Author: Slattery & Holman, P.C.

Operating a small business is an exhilarating and, at times, overwhelming endeavor. There are so many details to keep track of that it’s easy to forget about the nuts and bolts of your organization’s finances – especially if you didn’t start out as a “numbers person.” Whether you’re the one assembling your financial reports or you’ve hired a professional to do it, it’s important for you to know which of the numbers are most important and what they mean in terms of the decisions you make and your assessment of your business’s overall health. Below is our list of 12 of the most important elements of your financial report and what you can do with the information.

1. Profit and Loss

Every quarter, you should refresh your business’s profit and loss report to understand both your bank and tax reporting needs. It is the snapshot of your bottom line that you can use to drive your decisions and show to an outsider for them to gauge your strength. If you have a reconciled balance sheet, it will ensure that everything in your P & L has been captured.

2. Average Cost of Customer Acquisition

We all want customers, especially customers who keep spending or who spend big. Though it’s tempting to assume a “whatever it takes” attitude, you need to know the average cost of acquiring profitable customers and then assess whether you can cut those costs in order to make them even more profitable. Knowing the average cost of customer acquisition can also help you figure out how much to spend on customer retention.

3. Budget Versus Actual

Think you’re sticking to the plan based on what you see in terms of your bank account? The truth is that if you compare what you’ve budgeted to what you’ve actually spent, it will give you a far better sense of whether you’re staying on track and what kind of adjustments you need to make.

4. Cash Flow

Most people consider cash flow the most telling metric of all, and cash certainly is the lifeblood of any company. If you’re not keeping an eye on cash flow, you could find yourself caught off guard when it comes to making essential payments. Make measuring your cash flow, cash burn (the amount you go through monthly) and runway (how much you can operate based on your cash on hand) part of your regular business health check.

5. Fixed Burn Rate

No matter how well you’re doing, there is always the chance that you’re going to encounter some unforeseen circumstance or drop in business that is going to drive the need to cut costs. The best way to do that is to take a close look at your fixed burn rate and make sure it isn’t too high. As tempting as it may be to sign on to a long-term contract to save a little money, if you commit yourself to a payment you can’t afford at all in the future, you may be sorry. You might be better off removing some of those expenses from a contracted status so that you can eliminate them should the need arise.

6. Employee Productivity

Though it’s a given that your employees are your most valuable asset, that doesn’t mean you should be operating without ensuring you’re getting enough value out of them to justify what you’re spending. The best way to do that is to actually monitor each employee’s productivity to make sure everybody is pulling their weight.

7. Operating Cash Cycle

When a business wants to expand, they can’t move forward blindly. They need to have a good handle on how long it takes for cash to become available after their capital investment so they can feel confident in their ability to go through with the plans. Those who fail to understand their operating cash cycle risk joining the ranks of the 82% of businesses that fail due to poor cash flow management (according to U.S. Bank).

8. Churn Rate

When you think about how hard you work to acquire new customers, it’s no wonder that knowing how long you’re holding on to them is a key metric. If you’re churning through customers too quickly, it means that your product or service isn’t valuable enough to them to stick around for more. Understanding how soon they’re leaving, and the reason for it, is the first step in stopping the bleeding and making your business more profitable for the long term.

9. Regulatory Requirements for Your Industry

It’s easy to forget about regulatory requirements such as renewing your industry license or maintaining minimum capital, but failing to keep track of them leads to unnecessarily having to pay noncompliance penalties. Make sure that you include these elements within your financial report and calendar.

10. Projected Profit Loss Versus Actual

A big part of your annual financial plan should include a projection of what you believe your profit and loss will be, as well as a budget for each of your expense areas. Having this will allow you to compare what you projected to what your actual profit and loss is, and to then review where things went askew. Some discrepancies may be explainable and worthwhile, while others may be warnings of things getting out of control.

11. Profit Goals and Profit Per Customer

One of the most effective ways to promote profitability is to take a granular, analytical approach to your profit goals. By determining your short-term and long-term profit goals, you can then break it down to what your profit goal is, per customer, based on either your existing customers or the number of new customers you need to acquire. All of these numbers can drive internal processes and help you get where you want to go.

12. Financial Ratios

Ratios are among the most useful metrics that a small business owner can use to determine the overall financial health of their organization. Among the most important are their liquidity ratio (how much cash you have on hand to pay the monies you owe), efficiency ratio (how much it is costing you to bring in a single dollar) and profitability ratio (profit as it compares to revenue).

Each of these elements is extremely beneficial in helping you understand where your money is at any time. If you’d like to discuss how our services can help you run a successful business, please contact us for more information.

If you are the owner of a small business that obtained a Paycheck Protection Program (PPP) loan, you are most likely aware that the loan can be partially or totally forgiven if you used the loan proceeds for the required purposes. Loan forgiveness is not automatic and must be applied for. The borrower must submit a request to the lender or, if different, the lender who is servicing the loan, who then must make a decision upon the amount of forgiveness within 60 days.

The request must include documents to verify the number of full-time equivalent (FTE) employees and pay rates, as well as the payments on eligible mortgage, lease and utility obligations. The borrower must certify that the documents are true and that the borrower used the forgiveness amount to keep employees and make eligible mortgage interest, rent and utility payments.

The process of obtaining a PPP loan and applying for forgiveness has been complicated from the start, with guidance from the Small Business Administration (SBA) and the IRS coming in dribs and drabs; for a while, it seemed that the rules were modified every week. The original forgiveness application provided by the SBA was horrendously complicated and one almost needed an accounting degree to figure it out. It required the applicant to complete numerous complicated side computations and did not provide any corresponding worksheets.

To clarify the process, Congress stepped in and passed the Paycheck Protection Program Flexibility Act. As part of that legislation, the SBA was required to simplify the forgiveness application. In response, the SBA did somewhat simplify Form 3508, the original forgiveness application, and created an easier version: Form 3508EZ.

The 3508EZ is for use by:

• Self-employed borrowers with no employees.
• Generally, borrowers with employees who, during the covered period,
  • Did not reduce the annual salary or hourly wages of any employee by more than 25%;
  • Did not reduce the number of employees or the average paid hours of employees; and
  • Was unable to operate during the covered period at the same level of business activity as it did before February 15, 2020, due to compliance with requirements established or guidance issued by the Department of Health and Human Services, Centers for Disease Control and Prevention or Occupational Safety and Health Administration.

During the week of October 5th, the SBA released yet another simplified application, SBA Form 3508S, along with instructions for its use. This form can only be used if the total PPP loan amount the borrower received from their lender was $50,000 or less.

A borrower who qualifies for and uses SBA Form 3508S (or their lender’s equivalent form) is exempt from any reductions in the borrower’s loan forgiveness amount based on reductions in FTE employees or employee salaries or wages from the CARES Act that would otherwise apply.

While SBA Form 3508S does not require borrowers to show the calculations they used to determine their loan forgiveness amount, the SBA may request information and documents to review those calculations as part of its loan review process. Accordingly, the borrower must retain, for 6 years from the date when the loan is forgiven or repaid, all documentation submitted with the loan application to prove the borrower’s certification of eligibility for the PPP loan and material compliance with the PPP’s requirements, and to back up the loan forgiveness application.

Keep in mind that the application for forgiveness, which can be submitted electronically, must be submitted within 10 months after the end of the covered period to the borrower’s lender or the lender servicing the borrower’s loan.

If you have questions about how these changes might apply to your situation or need assistance with completing your forgiveness application, please give our office a call.

To say COVID-19 has made 2020 a disastrous year for just about everyone would be an understatement. In response to the economic slowdown and losses of income, Congress passed several extensive laws to benefit individuals and businesses that suffered financial hardship because of COVID-19. However, 2020 has given rise to more than the usual tax planning opportunities. Thus, you may find it appropriate to schedule a tax planning appointment before the close of the year to take advantage of the tax benefits and strategies available for 2020. Although everyone’s situation is unique, the following are examples of tax opportunities and strategies that may apply to you.

Individual Planning Opportunities

Did You Collect Unemployment Income This Year? If you did, you should be aware that it is taxable for federal purposes and that most states also tax unemployment benefits. Even if you had taxes withheld from the unemployment payments, don’t be misled into thinking it will be enough. Generally, the tax withheld from unemployment compensation is insufficient, especially when the extra $600 weekly amount of federal pandemic benefits is considered. It may be appropriate to see what effects the unemployment income will have on your taxes and avoid any unpleasant surprises next year when your return is prepared.

Did You Skip the Required Minimum Distribution (RMD) for 2020? Taxpayers were allowed to skip their RMD from their IRAs and most other retirement plans for 2020. But that might not be your best tax move, especially if you can take a distribution that will result in no or minimal taxes for this year. It may be appropriate to discuss whether you should take a distribution or not. We might be able to determine an amount that can be withdrawn tax-free.

Are You the Charitable Type? If so, 2020 offers a variety of ways to make contributions, including donating unused time off from work (if your employer participates in the program). The AGI limitation for deducting cash contributions has been increased significantly, and non-itemizers can make a deductible contribution of up to $300 (pending legislation may change the amount). Of course, a taxpayer over age 70½ can make contributions directly from a traditional IRA to a qualified charity. We can determine the method or combination of methods best suited to your particular circumstances.

Did You Have a Large Increase in Income This Year? If so, you might want to explore the benefits of a donor-advised fund, which will allow you to make a large deductible charitable contribution this year and meet your future charitable obligations by distributing the funds in upcoming years.

Divorced or Separated This Year? Divorce creates numerous issues that can have profound implications on your tax return and the amount of your tax liability. For example, who takes credit for the kids, allocating taxable income, who benefits from tax credits and deduction carryovers, alimony and who is responsible for the tax liabilities are just a few issues to consider. It might be appropriate to project your tax liability in advance, so you can prepare for the outcome.

Do You Have Health Insurance? Although the federal government no longer penalizes individuals for not having minimal essential health insurance, some states do. The penalties can be a substantial amount of money and should be considered in year-end tax planning.

Did You Suffer a Disaster Loss in 2020? There are special rules related to evaluating the losses incurred as the result of a disaster, and the results are likely quite different from what you might imagine.

Did Your Child File a Tax Return in 2018 or 2019 Under the Kiddie Tax Rules? If so, Congress has retroactively provided an alternative computation that could result in a substantial refund.

Congress Extended Tax Benefits That Expired After 2017. Some of those benefits may apply to you for 2020. Or, you can amend your returns for 2018 and 2019 (as appropriate) to take advantage of the following benefits: forgiveness of qualified principal residence debt income; deduction of mortgage insurance premiums; credit for energy-efficient home improvements; and credits for fuel cell vehicles, two-wheeled electric vehicles and alternative fuel refueling property.

Did You Sell Your Home This Year? If so, and you meet the ownership and occupancy tests, the gain from selling your main home will not be taxed up to $250,000 ($500,000 if you file a joint return with your spouse). If you don’t meet the requirements of both owning and using your home for at least 2 years in the 5 years prior to the sale date, you may still qualify for a partial home sale gain exclusion. For example, you may qualify for a reduced exclusion if you sold your home to relocate this year because of a change in employment or due to health. We can determine the amounts of excluded income and taxable gain, and project how your taxes will be impacted.

Have You Prepaid Enough Tax for 2020? One of the reasons for doing year-end tax planning is to determine if the tax you’ve already paid through withholding or estimated tax payments will be sufficient to cover your tax for the year in order to avoid a penalty for underpayment of estimated tax. If there’s a shortfall, we can see what steps you can take either to reduce the tax (perhaps by increasing your retirement plan contributions or bunching deductions) or increase your withholding for the rest of the year.

Business Planning Opportunities

Did You Place Qualified Improvement Property in Service During 2018, 2019 or 2020? Congress made a retroactive law change that allows a business owner to expense the costs of qualified improvement property in the year when it goes into service. This is instead of depreciating the cost of the improvement and claiming that deduction over a number of years. Qualified improvement property generally means any improvement to an interior portion of a building that is nonresidential real property, if the improvement is placed in service after the date the building was first placed in service.

Did You Have a Business Loss in 2018 or 2019? If you incurred a net operating loss (NOL) in 2018 or 2019, changes made by the CARES Act retroactively allow taxpayers to carry those losses back 5 years. This entails amending your returns for the earlier years to deduct the loss being carried back in order to get a refund on income taxes paid in those years.

Are You a Working Shareholder in an S Corporation? If so, you may not be aware of the IRS’s “reasonable compensation” requirements, which can influence your Section 199A (qualified business income) deduction and payroll taxes. Reviewing the requirements as they apply to your particular circumstances may avoid future problems with the IRS.

Did You Secure a Paycheck Protection Program Loan From the SBA? If so, you will need to apply for loan forgiveness if you haven’t already. The SBA forgiveness applications can be quite challenging. We can assist with completing the application and help you maximize your forgiveness.

Did You Have a Large Capital Gain in 2020? If so, you may want to consult with us about investing in a Qualified Opportunity Fund (QOF) to defer the taxable gain until 2026. Unlike Section 1031 tax-deferred exchanges, only the profits need to be invested in a QOF, not all the proceeds from the sale that resulted in the capital gain.

Other Planning Ideas
In addition to the situations above, some customary tax planning issues may also apply to you in 2020. Here are some examples:

• You could bunch deductions to itemize in one year and take the standard deduction in the subsequent year.
• Depending on your 2020 income, it may be appropriate to accelerate or defer your income and deductions. This will be especially crucial during 2020.
• Are you considering marriage or divorce? Some circumstances might warrant waiting until after the end of the year.
• If you expect your income to be abnormally low in 2020, this may be an opportunity to cash in on stock gains or exercise stock options while incurring little or no tax liability.
• As always, those with large estates may find it appropriate to make annual gifts of $15,000 per recipient (no limit on the number of recipients) to reduce the value of the estate. Married couples can gift $30,000 to each recipient. Giving appreciated assets will transfer the taxable gain to the recipient.

Opportunities for tax benefits and reducing your tax liability abound for 2020. Please contact our office for a virtual tax planning appointment and continue to be safe during these trying times.

The Health Savings Account (HSA) is one of the most misunderstood and underused benefits in the Internal Revenue Code. Congress created HSAs as a way for individuals with high-deductible health plans (HDHPs) to save for medical expenses that are not covered by insurance due to the high-deductible provisions of their insurance coverage.

HSA as a Retirement Vehicle – Although the tax code refers to these plans as “health” savings accounts, an HSA can act as more than just a vehicle to pay medical expenses; it can also serve as a retirement account. For some taxpayers who have maxed out their retirement plan options, an HSA provides another resource for retirement savings—one that isn’t limited by income restrictions in the way that IRA contributions are.

Since there is no requirement that the funds be used to pay medical expenses, a taxpayer can pay medical expenses with other funds, allowing the HSA to grow (through account earnings and further tax-deductible contributions) until retirement. In addition, should the need arise, the taxpayer can still take tax-free distributions from the HSA to pay medical expenses. Unlike traditional IRAs, no minimum distributions are required from HSAs at any specific age.

Withdrawals from an HSA that aren’t used for medical expenses are taxable and subject to a 20% penalty, with one exception: an individual age 65 or older will pay income tax on non-medical related distributions from their HSA, but won’t owe a penalty for using the funds for non-medical expenses.

Example: Henry, age 70, has an HSA account from which he withdraws $10,000 during the year. He also has unreimbursed medical expenses of $4,000. Of his $10,000 withdrawal, $6,000 ($10,000 – $4,000) is added to Henry’s income for the year, and the other $4,000 is both tax-free and penalty-free. If Henry had been 64 years old or younger, he’d be taxed on the $6,000 and pay a penalty of $1,200 (20% of $6,000).

Eligible Individual – To be eligible for an HSA in a given month, an individual:

1. Must be covered under an HDHP on the first day of the month;
2. Must NOT also be covered by any other health plan (although there are some exceptions);
3. Must NOT be entitled to Medicare benefits (i.e., generally must be younger than age 65); and
4. Must NOT be claimed as a dependent on someone else’s return.

Any eligible individual—whether employed, unemployed or self-employed—can contribute to an HSA. Unlike an IRA, there is no requirement that the individual have compensation, and there are no phase-out rules for high-income taxpayers. If an HSA is established by an employer, then the employee and/or the employer can contribute. Anyone, not just family members, can make contributions to HSAs on behalf of eligible individuals. Both employer and employee contributions made via the employer’s cafeteria plan are excluded from the employee’s gross income. Employees who make HSA contributions outside of their employers’ arrangements are eligible to take above-the-line deductions—that is, they don’t need to itemize deductions—for those contributions.

The Monetary Qualifications for an HDHP:

	Minimum Annual Deductible		Maximum Annual Out-Of-Pocket Expenses
Coverage	2020	2021	2020	2021
Self-Only	$1,400	$1,400	$6,900	$7,000
Family	$2,800	$2,800	$13,800	$14,000

Example: Family Plan Does Not Qualify: Joe has purchased a medical insurance plan for himself and his family. The plan pays the covered medical expenses of any member of Joe’s family if that family member has incurred covered medical expenses of over $1,000 during the year, even if the family as a whole has not incurred medical expenses of over $2,800 during that year. Thus, if Joe’s medical expenses are $1,500 during the year, the plan would pay $500. This plan does not qualify as an HDHP because it provides family coverage with an annual deductible of less than $2,800.

Example: Family Plan Qualifies: If the coverage for Joe and his family from the example above included a $5,000 family deductible and provided payments for covered medical expenses only if any member of Joe’s family incurred over $2,800 of expenses, the plan would then qualify as an HDHP.

Maximum Contribution Amounts – The amounts that can be contributed are determined on a monthly basis and are calculated by dividing the annual amounts shown below by 12. Thus, if an individual’s health plan only qualified that person for an HSA for 6 months out of the year, then that person’s contribution amount would be half of the amount shown.

	Maximum Annual Contribution
Year	2020	2021
Self-Only	$3,550	$3,600
Family	$7,100	$7,200

In addition to the amounts shown, an eligible individual who is age 55 or older can contribute an additional $1,000 per year.

How HSAs are Established – An eligible individual can establish one or more HSAs via a qualified HSA trustee or custodian (an insurance company, bank or similar financial institution) in much the same way that an individual would establish an IRA. No permission or authorization from the IRS is required. The individual also is not required to have earned income. If employed, any eligible individual can establish an HSA with or without the employer’s involvement. Joint HSAs between a husband and wife are not allowed; however, each spouse may have a separate HSA (and only if eligible).

Qualified Medical Expenses – To be non-taxable and penalty-free, distributions must be for unreimbursed expenses paid by the HSA account owner, their spouse or dependents for medical expenses that have the same definition as medical expenses for purposes of the medical itemized deduction.

Amounts paid for medicine or drugs are qualified medical expenses for HSA distribution purposes only if the medicine or drug is prescribed (determined without regard to whether such a drug is available without a prescription) or insulin.

The qualified medical expenses must be incurred only after the HSA has been established, and medical expenses paid or reimbursed by HSA distributions cannot also be claimed as medical expenses for itemized deduction purposes.

Generally, health insurance premiums are NOT qualified medical expenses for HSA purposes, except for the following:

• Qualified long-term care insurance (but only up to the amount of the annual age-based limit that applies for deducting long-term care premiums as medical expenses);
• COBRA health care continuation coverage;
• Health care coverage while receiving unemployment compensation; and
• For individuals age 65 or over, premiums for Medicare A, B or D, Medicare HMO and the employee share of premiums for employer-sponsored health insurance, including premiums for employer-sponsored retiree health insurance (but not Medigap policies).

Menstrual Products – Effective for tax years 2020 and later, the CARES Act added a provision that permits tax-free reimbursement from health savings accounts for costs of menstrual products.

Telehealth – The rule has been that taxpayers may only make contributions to HSAs while they are covered by a high-deductible health plan. However, the CARES Act allows a high-deductible health plan to provide telehealth and remote care services without a deductible for 2020 and 2021.

If you have questions related to the medical tax benefits of an HSA or how an HSA can supplement your retirement planning, please call our office.