Interior designers are experiencing the same pains that small businesses across the country are facing during the COVID-19 crisis. That’s why Design Manager recently hosted a webinar with Peter Lang, otherwise known as the Designer CPA, where he explained everything an interior design business owner needs to know about the Federal government's coronavirus relief response for small businesses.
A long-time friend of the Design Manager, Peter is a Certified Public Accountant with over 18 years of experience. He works exclusively with interior designers, so he understands exactly how interior design businesses operate and how tax laws apply to them. Here, we’ll recap Peter’s advice, including how to navigate the CARES Act and the different types of loans available, the process for applying for grants and loan forgiveness, and the changes to the tax deadlines for 2020.
Of course, the information presented here is changing every day as this unprecedented situation evolves and the federal government tries to keep up. The webinar took place on the 23rd, but on the 24th Congress approved $484 billion dollar of additional stimulus funding, some of which will be used for small business relief. Additional stimulus is still being negotiated. It’s more important than ever to communicate with your financial team and do thorough research to keep your business as healthy as possible.
The Stimulus Bill for Individuals
At the time this post is published, the stimulus available for individuals is as follows:
- $1,200 per individual; $500 for each dependent under age 17.
- Income phase-outs:
- Single taxpayers Adjusted Gross Income (AGI) phase out starts at $75,000, completely phased out at $99,000
- Married joint filing phase-out starts at $150,000, completely phased out at $198,000
- Head of household phase-out starts at $112,500, completely phase out at $136,500
When determining your income, the IRS will look at your 2018 tax return if you have not yet filed the 2019 return. When asked if they have received their stimulus payment as of yet, the response from Design Manager clients was mixed. Those who have set up direct deposit with the IRS for past tax refunds were more likely to have received their stimulus payment. If you are still waiting, you may need to confirm your bank information on the IRS website. Be sure you have information such as your address, DOB, SSN, and AGI as reported on your previous return, ready.
Your eligibility for the individual stimulus depends on your personal income. If you’re a sole proprietor or have an S-Corp or partnership, in which case your business income is included on your personal tax return, your business income does affect your eligibility. If your business is a C-Corp, its income does not affect your individual eligibility.
Rushing to file your 2019 return will not change your eligibility for immediate funding. However, hope is not lost. Peter is hearing that the IRS will reconcile your 2019 eligibility when you file your 2020 return next year. While he doesn’t have final guidance on exactly how it will be done, the idea is that if you fall below the threshold for eligibility according to your 2019 and 2020 income, you will receive some type of credit on your tax return that will come as a higher refund.
The CARES Act: Support for Businesses
The CARES Act offers two different types of loans for small businesses, the Disaster Relief Loans and the Paycheck Protection Program Loans.
Disaster Relief Loans
The fundamental facts of the Disaster Relief Loans are as follows:
- Small businesses may receive a loan of up $2 million
- Must be applied for via SBA.gov
- Individuals operating under a sole proprietorship, with or without employees, or as an independent contractor, may also apply
- Loan proceeds can be used to pay fixed debts, payroll, accounts payable and other business costs
- Loan terms:
- Interest rate is 3.75% for small businesses
- Loan term of up to 30 years
- Personal guarantee is not required on loans of up to 200k
- Grant or advance of up to 10k (does not need to be paid back)
Disaster Relief Grants
When you can apply for a disaster relief loan from the Small Business Association’s website (SBA.gov), there will be a question, “would you like to be considered for a $10,000 grant?” If you check this box, you may receive up to that amount in funds that you will not have to pay back. Note that the SBA has closed applications for this round of grant money; however, Congress may approve funding for a new round of grants.
Paycheck Protection Program Loan (PPP)
The PPP loans differ from the disaster relief loans in that they are administered directly by banks instead of by the federal government. Therefore, the bank you choose and the relationship you have with your banker has a material impact on your ability to get this type of loan. Almost all Design Manager survey responders that got funded say they had a previous relationship with the bank before applying. Also, applying and following up with your banker increases your chances of getting funded in this time when banks are overwhelmed. The squeaky wheel gets the grease.
Basic Facts of the PPP Loans:
- Each eligible small business may receive a loan of up to 2.5x its average monthly payroll for the year preceding the loan, but not more than $10,000,000.
- Business owners seeking PPP loans must apply to a bank offering PPP loans directly.
- The loans will be available until June 30, 2020
- Companies with up to 500 employees are eligible. Larger companies are eligible to the extent the applicable SBA size standard for their industry (NAICS code) allows for a greater number of employees.
- Loans can be used to cover certain costs of payroll, employee benefits, interest payments, rent, mortgage and utilities.
- The maximum amount of PPP loan loney that can be used for an individual employee is $100,000
- Sole proprietors (without payroll) can apply to their banks for PPP using their most recent tax returns
- Terms: Complete payment deferment (including payment of principal, interest, and fees) for 6-12 months. No personal loan guarantee required. Loans have a maturity of two years and an interest rate of 1%.
- Loan forgiveness is available for loan proceeds used for permitted costs in the 8 weeks after the loan is obtained, all subject to limitations on workforce reductions and other requirements. More on that below.
Loan Forgiveness Conditions: The most interesting part of the PPP is that the government is offering potential forgiveness of these loans if certain terms are met:
- Forgiveness is based on the employer maintaining or quickly rehiring and maintaining salary levels.
- Forgiveness will be reduced if full-time headcount declines or if salary and wages decrease.
- The individual employees do not have to be the same; the headcount and the dollar amounts are what matter.
- Note that employees that are on 1099s do not count as employees because they are technically individual contractors. You are not paying payroll tax for them, so they do not count as employees. Those employees can apply for the PPP loan themselves.
Additional Details on PPP Loan Forgiveness:
- To be eligible to receive the maximum amount of forgiveness, you must use at least 75% of the loan for payroll expenses (salary, tips, bonuses, as well as group insurance plans)
- Forgiveness will have to be applied for each recipient - no application, no forgiveness.
- Each bank has its own specific set of application questions and guidelines, for example keeping loan funds in a separate bank account. Ask your bank now for a list of forgiveness items and the application. Make sure to apply for forgiveness as soon as possible after the 8 week cover period is over.
For businesses with payroll, applying for PPP loan forgiveness will require reports from your payroll services provider. Thankfully, in Peter’s experience thus far, payroll services companies are being extremely cooperative and proactive in proving the necessary reports to their clients. Applicants will also need profit and loss reports and income statements, both of which can be generated within Design Manager. You will also need your business tax returns or Schedule C, if you are self employed.
Technically you cannot accept both a disaster relief loan and a PPP loan. You can apply for both, but not receive both. Peter recommends you talk to your accountant or CPA about which makes more sense for your business.
If you get rejected for both a disaster loan and a PPP loan, all hope is not lost: The Federal Government may defer payroll taxes, and/or give payroll tax credits in the future. You can only take one of those options, so for now, if a PPP loan makes sense for your business, don't worry about losing the payroll tax credits. Don’t be discouraged by mass emails from your bank saying they are out of PPP funding; they may and probably will get refunded, so apply anyway.
Download the full CARES ACT presentation
Changes to the 2019 Tax Deadlines
- File and payment delayed for federal and most states until July 15, 2020 for 2019 tax year
- Payment for 2020 estimated tax payments delayed until July 15, 2020 for Federal and most States
- You don’t want to make any 2020 estimated tax payments until you know how this pandemic is going to change your profit for the first half of 2020. Meet with your accountant and look through cash flow prior to sending in estimated payments.
- Make sure you are checking in on all of the states you file in. Some states have delayed by not as far as July 15
To wrap things up, Peter shared his advice on how to manage cash flow during the pandemic. He recommends keeping a keen eye on business spending. Design Manager offers a number of helpful reports, including:
- Project cash flow report
- Project cash allocation
- Cash flow statement
- 12 month cash flow
- Twelve month income comparison
Knowing exactly where you spent money will help you target where to trim costs. Avoid capital expenditures, but don’t resort to lowering your fees to generate more business. If you do, it will be difficult – if not impossible – to return to your normal pricing post-pandemic.
Peter, as well as Design Manager, are committed to helping interior designers understand how the Federal Stimulus and temporary changes to the tax laws can impact your business. The Design Manager blog will be following this evolving situation and reporting on new relief options for interior design businesses, as well as advice on how to navigate these difficult times while maintaining your value as a business owner and interior designer.
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