Cash Preservation, Tax Planning, and PPP Loan Forgiveness

As we enter the fourth quarter of 2020, there is still much uncertainty in the manufacturing marketplace, as well as the broader economy. We don’t know how long the COVID-19 pandemic, and the resulting disruptions to commerce and supply chains, will last. The 2020 presidential election creates further uncertainty in that a change of administrations, if it occurs, will likely result in a change in tax laws.

Amid economic and political uncertainty, the tried-and-true strategies for manufacturers still apply. During the fourth quarter of 2020, we recommend that manufacturers focus on three strategies:

  1. Preservation of cash and expense reduction
  2. Tax planning
  3. Forgiveness of Paycheck Protection Program (PPP) loans

1. Cash preservation and expense reduction

  • Refinance loans

    The first thing to consider regarding cash preservation and expense reduction is to refinance any loans, since interest rates are at historically low rates. Your savings will depend on your debt load, so you should analyze what your interest expenses are now to determine how much you can save annually. Many manufacturers have loans with interest rates of 5% to 6.25%. With today’s rates, you can potentially shave two full percentage points and get down to 3%, or even 3.25% if you are highly creditworthy.

    A warning: banks are limited as to the number of loans they can refinance each quarter. If you want to refinance in Q4 2020, call your banker now to avoid being pushed into the first quarter of 2021.

    Low interest rates also can benefit you if you have a line of credit. Consider drawing on it to pay current expenses so you can preserve your cash on hand.

  • Tame overhead costs

    To reduce costs, talk with your vendors and suppliers, especially if you have seen price increases or lags in supply chain. The market is competitive and if vendors aren’t willing to work with you don’t be afraid to shop around. If your suppliers are on the coasts, where we have seen supply chain slowdowns, consider looking for vendors closer to home.

    Look at variable costs and overhead. Potential savings may lie in costs for advertising, salaries, entertainment, and travel. Renegotiate equipment leases, if possible. Make sure you have real-time data so you’re working with current numbers for cash flow forecasting and look at the margins to understand your variable costs to truly tighten your spending belt.

  • Customer relations

    Due to the COVID-related traveling restrictions, lack of in-person events, and cancellation of trade shows – in order to sustain and attract new customers you need to be sure and adapt your marketing efforts. Be sure you are continually checking in on your current customers and potential customers. In terms of customer collections, make sure your collection process is locked down and you have signed supplier and vendor agreements that outline specific terms of payment collection.

  • Payroll tax deferral

    If you haven’t taken advantage of the current employer payroll tax deferral, consider opting in now. The deferral runs through the end of the year and enables you to defer the employer’s portion of payroll taxes (FICA) you pay for your employees. This is a deferral only – not a tax cut – so you will have to pay it back in 2021 and 2022, on top of the payroll taxes you will owe for those years. But it will allow you to preserve cash now.

  • Workforce

    Right size your workforce. If business is down, employees should not be working and being paid extra for overtime. Look into shared work programs. Consider outsourcing some functions such as production, accounting, marketing, and human resources.

2. PPP loan forgiveness

Although we are in the loan forgiveness application window for PPP loans, uncertainty surrounds this process due to many outstanding tax and accounting questions, and we are awaiting guidance from Congress and the IRS on several issues.

For now, the important thing to remember is that the 24-week loan period (for organizations that chose the 24-week option) for most organizations is coming to an end. Banks are accepting and processing forgiveness applications but are focusing on applications related to loans of more than $150,000. That’s because Secretary of the Treasury Steven Mnuchin has discussed blanket forgiveness for loans of less than $150,000, in which case those loan recipients would not be required to file an application. No decision has yet been made about blanket forgiveness, however.

If you did receive a PPP loan, be sure your employee count is where it needs to be for forgiveness. There are several methods that can be used for employee count, but this is a factor that is just as important as spending the loan funds properly.

3. Tax Planning

Tax planning this year is incredibly important and is strongly related to the status of PPP loans and loan forgiveness. Unfortunately, there are numerous questions about accounting for the loan funds and their impact on taxes for which the IRS has not yet issued guidance.

Congress intended for PPP loan proceeds to be non-taxable. However, the IRS has issued guidance that expenses paid for with those funds are not tax deductible, effectively taxing the loan proceeds. Congress and the IRS have not worked out their differences yet, and the uncertainty saddles manufacturers and other businesses with two tax planning scenarios – one if the funds are taxed and one if they’re not.

Some manufacturers received up to $500,000 in PPP loans. If those funds must be recognized as income with few or no offsetting deductions, it could produce a large swing in income taxes for business owners.

We are working on tax projections for many clients now. It is essential to make sure your financials are up to date. Depending on what happens with the tax implications of PPP loans, you will need to make changes based on new legislation.

Looking to the future

Depending on what happens with the presidential election, we could see major changes in tax law. While any changes would likely not take effect until 2021, it’s important to be prepared and plan now.

If, after the presidential election, it appears that tax rates may increase, we recommend that you consider recognizing more income this year while rates are lower. Alternatively, if rates were to go lower in the future, it could be advantageous to hold off on recognizing income until next year.

Adams Brown advisors are keeping a close eye on changes in the PPP loan program and related IRS guidance, as well as the implications of the presidential election. We will inform you of any changes that may impact your situation. Please reach out to us if you have questions or concerns.