12.8.20 | Industry Insights
For manufacturing, distribution and retail companies, the less said about 2020, the better. Supply chain disruptions, cash flow issues, shifts in consumer behavior, and severe government restrictions are only part of the many challenges that made the struggle of the year keenly felt by industry executives and business owners. Nevertheless, the difficult lessons of 2020 can be leveraged immediately to help stabilize companies and assist them in preparing for a successful 2021. As businesses begin to develop their short- and long-term strategies, examining and discussing the following key considerations which can be pivotal to building a stronger future, may help pave the way for a smoother than expected transition into a New Year that still poses a lot of questions.
Paycheck Protection Program (PPP) and the Treatment of Forgiveness – Questions still cloud over PPP loan forgiveness. The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides that loan forgiveness will not be income taxable. In addition, the IRS issued Rev. Rul. 2020-27, which reinforces Notice 2020-32 and states that business expenses paid from proceeds of forgiven PPP loans will not be deductible if there is a reasonable expectation of loan forgiveness. The reasonable expectation rule applies even if the taxpayer has not yet submitted an application for forgiveness by the end of the taxable year. With little time remaining in 2020, companies should consider the lost deductions when projecting the tax effect to the firm and consider the interplay of PPP loan forgiveness with other tax provisions. For more information on the PPP program, please review Berdon’s articles on PPP forgiveness and subsequent updates.
- Interest Rate – Companies should review the interest rate they have on their credit facility and consider re-negotiating. With interest rates low, they may want to consider refinancing or renegotiating a facility at a lower rate.
- Covenants – Companies need to take an early look at covenants to make sure they will meet them. If not, seek to obtain a waiver. With lower potential income, companies need to be cognizant of their required thresholds to ensure covenants are met.
- Clean-up Requirement – A credit facility may require a company to pay down the facility and not borrow any new funds for a certain period of time. Planning cash flow ahead will help meet this requirement.
- PPP – Review loan agreements and make sure that a PPP loan does not break the agreement by having secured additional debt. Many loan agreements must have specific provisions for additional debt. While many companies use PPP loan proceeds for forgivable uses, they should still ensure that their agreements allow for the PPP loan, and if not look to amend those agreements.
Inventory – Companies should evaluate their inventory based on both human insights and actual sales data. Specifically, they should get input from sales departments as to customer demand as well as overall demand within the marketplace. Companies should also review their inventory aging reports for overstocked and obsolete items and make required adjustments. Additionally, food and beverage companies should consider consulting their tax advisor to investigate amending their 2019 tax returns in order to take the disaster loss for inventory that was spoiled or thrown out due to COVID-19.
Going further, companies should perform a year end physical inventory, which may be completed by members of the company, as well as observed virtually by outside auditors. Companies should also consider consulting with their CPA, as well as third-party warehouses, where applicable, to determine if there are any changes needed from prior years’ observations and what the setup will be in 2021. Moreover, companies should update their documented instructions and procedures for recording and controlling the results of the physical inventory count in the event of any process revisions due to the pandemic.
Research and Development (R&D) Credits – Companies should be aware that costs related to R&D for new products and processes, enhancements to current products or processes, or improvements to software can all qualify for tax credits. Such costs that attribute to these credits are payroll, consulting fees, cost of supplies, patent fees if applicable, and many more. Click here to learn more about R&D tax credit eligibility.
Receivables – When loans are structured as asset-based lending, a healthy accounts receivable (AR) is a key indicator of a company’s position. While some companies may be less inclined to write off uncollectible AR, including it does cloud the true viability of AR. A more reliable AR can be leveraged to potentially determine the availability of line of credit funds as banks look at this benchmark in gauging future collections. Additionally, AR helps indicate customer satisfaction, which is critical during periods of business interruption, such as the one caused by the COVID-19 pandemic, when companies are looking to retain recurring business.
State/Locality Sourcing – COVID-19 forced nonessential businesses to close their facilities —causing a significant portion of the workforce to telecommute. Telecommuting employees may work in states and localities where the company does not traditionally operate. This can create a variety of nexus and apportionment issues, which can trigger new state tax filing and withholding requirements. For proper tax planning, companies should know where their employees are working and consult their tax advisors to help reduce the impact that the pandemic may have had on their overall state and local tax liability, specifically the New York City (NYC) Unincorporated Business Tax (UBT) liability. For NYC-based companies, identifying and documenting their employees’ work locations could yield considerable savings with employees that live outside the city. For a deeper dive into the complexities of the UBT click here. In addition, if companies had any change in inventory locations during 2020, they should consult with their tax advisor to ensure proper state filings are being made.
Budgeting/Forecasting – Often, budgets are set far in advance. Now may be a good time to take a second look at your 2021 budget, keeping in mind specific areas such as selling expenses – including marketing, networking, travel, and other company events where decreases may prove beneficial – and, conversely potentially increase the IT budgets, especially for web-based sales. What may have been consistent over the last number of years may need to change based on the way people are currently working and interacting with customers.
Rent – Consider approaching your landlord about rent abatements and deferrals. Click here to learn more on navigating the available rent concession options. Additionally, companies should continue to plan for their long-term use of space. Should they be looking to move to a hybrid model and include hoteling or the opening of smaller satellite offices? Get an industry leaders perspective on bold new directions in office space.
Amended Benefit Agreements – Meet with plan administrators and custodians about potential amendments that need to be made to the benefit plan documents as a result of the Setting Every Community Up for Retirement Enhancement (SECURE) and CARES Acts. These Acts allowed for additional contributions and allowable distributions to be made from certain benefit plans as a result of the pandemic.
Deferred Self-employment Taxes – The CARES Act allows employers to defer the deposit and payment of the employer’s share of Social Security taxes and self-employed individuals to defer payment of certain self-employment taxes, with the deferral ending on December 31, 2020, and 50% of the tax due by December 31, 2021 and the remaining 50% due by December 31, 2022.
Unclaimed Property – With many states suffering fiscal constraints, state governance will look to add additional revenue as a result of the pandemic. One area is unclaimed property. With companies often having old outstanding checks on their bank reconciliations, states may be more punitive for companies that did not escheat old property.
Technology – As was the case for most of 2020, with a large number of employees working from home and sharing information over unsecured connections, companies must be vigilant in their IT and cyber protection. Suspicious cyber activity in 2020 surpassed any previous year’s benchmarks. As employees continue to work outside of the office, companies need to ensure that their customers confidential and privileged information is safe. Furthermore, now is a good time for IT and finance departments to examine and scrutinize their internal control processes, ensuring that they have the proper controls in place, especially as workflow and processing may have changed. Additionally, companies should attempt to go truly paperless. Many have delayed this conversion, however the companies that best transitioned to working from home in March of 2020 were the ones that were already paperless. Learn about the need for a more vigilant cybersecurity program.
Vendor Files – Year end is a good time for companies to review their AP vendor list. Often vendor lists are used for an approval list for the bank to cash checks. By reviewing and deleting old AP vendors, companies can help prevent potential fraud and misappropriation.
With the many curve balls that 2020 hurled at manufacturing, distribution and retail companies, they are looking at how to adjust to the new realities as well as ensuring they have the proper plans in place for the coming year. With all of the uncertainties surrounding the COVID-19 pandemic, companies need to be well prepared. The companies that can best adapt to the uncertainty will be best able to refocus attention on increasing sales and keeping costs down.
If you have questions or would like to pursue some or all of these recommendations, contact Marcy Greenfield at 516.806.3425 or MGreenfield@berdonllp.com.
Berdon LLP, New York Accountants