Earlier this year, the Small Business Association (SBA) made changes to its programs that will widen access to government-backed small business loans. The change allows more non-bank lenders to offer SBA loans, expanding access to funding for underserved businesses. Additionally, implified lending criteria will save time on loan documentation, providing a more efficient path to approval.
THE COMMUNITY ADVANTAGE SBLC
The SBA is also implementing the Community Advantage SBLC license for nonprofits and mission-oriented lenders who wouldn’t otherwise qualify to be SBA lenders. These lenders primarily focus on underserved markets, including startups and minority-, veteran-, and women-owned businesses. Community Advantage lenders also work in rural and low-income communities.
APPROVAL CRITERIA
To qualify for an SBA loan, a business must be considered creditworthy and reasonably able to repay the loan. The SBA previously considered nine factors to determine creditworthiness. The new rules consider just three:
Credit score or history
Business earnings or cash flow
Collateral
Talk with your professional advisor to learn more about SBA’s new rules and loans.
To help you boost your business resources — or start a new business — in 2024, you may want to consider a small-business grant instead of a loan. Why? You don’t have to pay back a grant. However, your business will most likely have to include any grant amounts in taxable income.
GET STARTED
Consult your tax and financial advisors, then do some research. Following are some places to look.
FEDERAL AGENCIES
Grants.gov is a comprehensive database of government small-business grants administered by various federal agencies, such as the Departments of Education and Veterans Affairs.
Small Business Innovation Research and Small Business Technology Transfer programs connect small businesses with federal grants and contracts from 11 agencies.
The USDA Rural Business Development Grant program provides financing to strengthen and grow small businesses in rural communities.
The SBA’s Program for Micro entrepreneurs or PRIME Investors offers grants to microenterprise development organizations.
STATE AND REGIONAL RESOURCES
The U.S. Department of Commerce helps businesses find financing (including state or regional grants), secure locations, and recruit employees.
Small Business Development Centers (SBDCs) provide support for small businesses and aspiring entrepreneurs. They’re often associated with local universities or a state’s economic development agency.
Minority Business Development Agency Centers (MBDA) is a national network of business centers dedicated to growing and promoting minority-owned small businesses. These centers help business owners access capital, secure contracts, and compete in emerging markets.
The SBA’s State Trade Expansion Program funds state governments to implement small businesses STEP grants to cover costs to start or expand into international markets.
No need for a crystal ball to discern what small businesses may see ahead from the IRS. It’s in the Service’s most recent Strategic Operating Plan. *Some of the upgrades the IRS has on the list include:
The recently launched Online Portal for Businesses to e-file 1099 series information returns (https://www. irs.govfiling/e-file-forms-1099-with-iris) and respond to certain notices online, including LTR0143C “Signature Missing.”
Having the Small Business Online up and running by next tax season. So, your business will be able to see its tax information, track refunds, and schedule and track payments.
Simplified and mobile-friendly Forms 940, 941, and 944 available in multiple languages.
The ability for you to respond to the correction of self-employment income, employment-related-ID- theft notifications, and other online notices. Notice language will be simplified.
Further digitalization of paper forms to include the most popular forms—the 1040 and 941.
Don’t hesitate to touch base with us if you have questions about the upgrades and using them or the IRS’s Strategic Operation Plan.
Selling small business stock can have significant tax implications, depending on several factors, such as the holding period, the nature of the business, and the type of stock sold.
CAPITAL GAINS
The tax rate for selling small business stock depends on whether it’s a long-term or short-term capital gain. If you’ve held the stock for more than a year before selling, any gain will be taxed at the long-term capital gains rate, which is generally lower than the ordinary income tax rate. If held for a year or less, the gain is considered short-term and will be taxed at your ordinary income tax rate.
In certain situations, losses from selling small business stock can be used to offset other capital gains. You can offset up to $3,000 of other income if your losses exceed your gains. Any remaining losses can be carried forward to future years.
QUALIFIED STOCK
Section 1202 of the Internal Revenue Code provides a potential exclusion for gains from certain small business stock. If the stock is a Qualified Small Business Stock (QSBS) you might be able to exclude up to 100% of your capital gains from federal tax, subject to certain limitations. However, this rule only applies if you’ve held the stock for at least five years.
NET INVESTMENT INCOME TAX
Another tax implication is the Net Investment Income Tax (NIIT). If your modified adjusted gross income exceeds a certain threshold, you may be subject to an additional 3.8% tax on any net gain from the disposition of your stock.
BUSINESS SALE
If the business is sold instead of just some of the stock, the transaction could have different tax implications, depending on whether it’s structured as an asset sale or a stock sale. Tax consequences can be complex and vary significantly.
Speak with your tax professional when selling small business stock.
Take the guesswork out of securing a business loan. Whether it’s to fund expansion or purchase equipment, being prepared can speed up the process.
CHECK YOUR SCORES
Unless you own an established company, lenders will check your personal credit score when making business lending decisions. An individual score greater than 700 increases the odds that you will be approved. Business credit scores generally range from 0 to 100. So, the higher, the better.
HAVE A PLAN
Prepare a business plan because lenders will ask what you will do with the loan proceeds to increase your company’s profits. Explain your business strategy and include current and historical financial statements that contain a balance sheet and cash flow statement.
OFFERING SECURITY
Depending on the size of the loan you’re seeking, the lender may ask for collateral or a personal guarantee. The collateral could be equipment, receivables, real estate, or other businesses you own. And the personal guarantee states that you will pay the loan if the company doesn’t.
Keeping your company running smoothly can be more than a full-time job, which can leave little time to focus on your financial goals. However, decision making without considering goals and your future may be something you might regret in the future.
BUDGET MANAGEMENT
Cash-flow problems strike most small business owners. But you can avoid them by creating and managing realistic budgets—at work and home. Monitor your income, expenses, inventory, and cash, adjusting and rebalancing when required to cover your fixed costs and maintain a cash reserve.
Also, meet with your tax professional regularly to maximize your business deductions. This may include timing of income and expenses and saving for retirement in the most tax-efficient way.
RISK MANAGEMENT
Protect your business with adequate insurance coverage. Businesses have any number of risks, and having coverage can alleviate some of your stress.
Perhaps the most important risk to cover is to ensure that your family will be financially secure should the unthinkable happen. Make sure you have adequate life insurance. Also, disability insurance to help protect your personal earnings potential if you’re ill or injured and unable to work.
EYEING THE END
Even if retiring is a long way down the road, create a succession plan. Unpredictable events can hasten your exit. Identify and document who will take over the company in your absence, and, if that means selling it, determine how you’ll get paid. Work with your legal, tax and financial professionals to properly draft required documents.
Perhaps you operate your small business as a sole proprietorship and want to form a limited liability company (LLC) to protect your assets. Or maybe you are launching a new business and want to know your options for setting it up. Here are the basics of operating as an LLC and why it might be appropriate for your business.
An LLC is somewhat of a hybrid entity because it can be structured to resemble a corporation for owner liability purposes and a partnership for federal tax purposes. This duality may provide the owners with the best of both worlds.
Personal asset protection
Like the shareholders of a corporation, the owners of an LLC (called “members” rather than shareholders or partners) generally aren’t liable for the debts of the business except to the extent of their investment. Thus, the owners can operate the business with the security of knowing that their personal assets are protected from the entity’s creditors. This protection is far greater than that afforded by partnerships. In a partnership, the general partners are personally liable for the debts of the business. Even limited partners, if they actively participate in managing the business, can have personal liability.
Tax implications
The owners of an LLC can elect under the “check-the-box” rules to have the entity treated as a partnership for federal tax purposes. This can provide a number of important benefits to the owners. For example, partnership earnings aren’t subject to an entity-level tax. Instead, they “flow through” to the owners, in proportion to the owners’ respective interests in profits, and are reported on the owners’ individual returns and are taxed only once.
To the extent the income passed through to you is qualified business income, you’ll be eligible to take the Code Section 199A pass-through deduction, subject to various limitations. In addition, since you’re actively managing the business, you can deduct on your individual tax return your ratable shares of any losses the business generates. This, in effect, allows you to shelter other income that you and your spouse may have.
An LLC that’s taxable as a partnership can provide special allocations of tax benefits to specific partners. This can be an important reason for using an LLC over an S corporation (a form of business that provides tax treatment that’s similar to a partnership). Another reason for using an LLC over an S corporation is that LLCs aren’t subject to the restrictions the federal tax code imposes on S corporations regarding the number of owners and the types of ownership interests that may be issued.
Review your situation
In summary, an LLC can give you corporate-like protection from creditors while providing the benefits of taxation as a partnership. For these reasons, you should consider operating your business as an LLC. Contact us to discuss in more detail how an LLC might benefit you and the other owners.
What if you decide to, or are asked to, guarantee a loan to your corporation? Before agreeing to act as a guarantor, endorser or indemnitor of a debt obligation of your closely held corporation, be aware of the possible tax consequences. If your corporation defaults on the loan and you’re required to pay principal or interest under the guarantee agreement, you don’t want to be blindsided.
Business vs. nonbusiness
If you’re compelled to make good on the obligation, the payment of principal or interest in discharge of the obligation generally results in a bad debt deduction. This may be either a business or a nonbusiness bad debt deduction. If it’s a business bad debt, it’s deductible against ordinary income. A business bad debt can be either totally or partly worthless. If it’s a nonbusiness bad debt, it’s deductible as a short-term capital loss, which is subject to certain limitations on deductions of capital losses. A nonbusiness bad debt is deductible only if it’s totally worthless.
In order to be treated as a business bad debt, the guarantee must be closely related to your trade or business. If the reason for guaranteeing the corporation loan is to protect your job, the guarantee is considered closely related to your trade or business as an employee. But employment must be the dominant motive. If your annual salary exceeds your investment in the corporation, this tends to show that the dominant motive for the guarantee was to protect your job. On the other hand, if your investment in the corporation substantially exceeds your annual salary, that’s evidence that the guarantee was primarily to protect your investment rather than your job.
Except in the case of job guarantees, it may be difficult to show the guarantee was closely related to your trade or business. You’d have to show that the guarantee was related to your business as a promoter, or that the guarantee was related to some other trade or business separately carried on by you.
If the reason for guaranteeing your corporation’s loan isn’t closely related to your trade or business and you’re required to pay off the loan, you can take a nonbusiness bad debt deduction if you show that your reason for the guarantee was to protect your investment, or you entered the guarantee transaction with a profit motive.
In addition to satisfying the above requirements, a business or nonbusiness bad debt is deductible only if:
You have a legal duty to make the guaranty payment, although there’s no requirement that a legal action be brought against you;
The guaranty agreement was entered into before the debt becomes worthless; and
You received reasonable consideration (not necessarily cash or property) for entering into the guaranty agreement.
Any payment you make on a loan you guaranteed is deductible as a bad debt in the year you make it, unless the agreement (or local law) provides for a right of subrogation against the corporation. If you have this right, or some other right to demand payment from the corporation, you can’t take a bad debt deduction until the rights become partly or totally worthless.
These are only a few of the possible tax consequences of guaranteeing a loan to your closely held corporation. Contact us to learn all the implications in your situation.
Owners of incorporated businesses know that there’s a tax advantage to taking money out of a C corporation as compensation rather than as dividends. The reason: A corporation can deduct the salaries and bonuses that it pays executives, but not dividend payments. Thus, if funds are paid as dividends, they’re taxed twice, once to the corporation and once to the recipient. Money paid out as compensation is only taxed once — to the employee who receives it.
However, there are limits to how much money you can take out of the corporation this way. Under tax law, compensation can be deducted only to the extent that it’s reasonable. Any unreasonable portion isn’t deductible and, if paid to a shareholder, may be taxed as if it were a dividend. Keep in mind that the IRS is generally more interested in unreasonable compensation payments made to someone “related” to a corporation, such as a shareholder-employee or a member of a shareholder’s family.
Determining reasonable compensation
There’s no easy way to determine what’s reasonable. In an audit, the IRS examines the amount that similar companies would pay for comparable services under similar circumstances. Factors that are taken into account include the employee’s duties and the amount of time spent on those duties, as well as the employee’s skills, expertise and compensation history. Other factors that may be reviewed are the complexities of the business and its gross and net income.
There are some steps you can take to make it more likely that the compensation you earn will be considered “reasonable,” and therefore deductible by your corporation. For example, you can:
Keep compensation in line with what similar businesses are paying their executives (and keep whatever evidence you can get of what others are paying to support what you pay).
In the minutes of your corporation’s board of directors, contemporaneously document the reasons for compensation paid. For example, if compensation is being increased in the current year to make up for earlier years in which it was low, be sure that the minutes reflect this. (Ideally, the minutes for the earlier years should reflect that the compensation paid then was at a reduced rate.) Cite any executive compensation or industry studies that back up your compensation amounts.
Avoid paying compensation in direct proportion to the stock owned by the corporation’s shareholders. This looks too much like a disguised dividend and will probably be treated as such by IRS.
If the business is profitable, pay at least some dividends. This avoids giving the impression that the corporation is trying to pay out all of its profits as compensation.
You can avoid problems and challenges by planning ahead. If you have questions or concerns about your situation, contact us.
If your company is planning to merge with or buy another business, your attention is probably on conducting due diligence and negotiating deal terms. But you also should address the post-closing financial reporting requirements for the transaction. If not, it may lead to disappointing financial results, restatements and potential lawsuits after the dust settles.
Here’s guidance on how to correctly account for M&A transactions under U.S. Generally Accepted Accounting Principles (GAAP).
Identify assets and liabilities
A seller’s GAAP balance sheet may exclude certain intangible assets and contingencies, such as internally developed brands, patents, customer lists, environmental claims and pending lawsuits. Overlooking identifiable assets and liabilities often results in inaccurate reporting of goodwill from the sale.
Private companies can elect to combine noncompete agreements and customer-related intangibles with goodwill. If this alternative is used, it specifically excludes customer-related intangibles that can be licensed or sold separately from the business.
It’s also important to determine whether the deal terms include arrangements to compensate the seller or existing employees for future services. These payments, along with payments for pre-existing arrangements, aren’t part of a business combination. In addition, acquisition-related costs, such as finder’s fees or professional fees, shouldn’t be capitalized as part of the business combination. Instead, they’re generally accounted for separately and expensed as incurred.
Determine the price
When the buyer pays the seller in cash, the purchase price (also called the “fair value of consideration transferred”) is obvious. But other types of consideration muddy the waters. Consideration exchanged may include stock, stock options, replacement awards and contingent payments.
For example, it can be challenging to assign fair value to contingent consideration, such as earnouts payable only if the acquired entity achieves predetermined financial benchmarks. Contingent consideration may be reported as a liability or equity (if the buyer will be required to pay more if it achieves the benchmark) or as an asset (if the buyer will be reimbursed for consideration already paid). Contingent consideration that’s reported as an asset or liability may need to be remeasured each period if new facts are obtained during the measurement period or for events that occur after the acquisition date.
Allocate fair value
Next, you’ll need to split up the purchase price among the assets acquired and liabilities assumed. This requires you to estimate the fair value of each item. Any leftover amount is assigned to goodwill. Essentially, goodwill is the premium the buyer is willing to pay above the fair value of the net assets acquired for expected synergies and growth opportunities related to the business combination.
In rare instances, a buyer negotiates a “bargain” purchase. Here, the fair value of the net assets exceeds the purchase price. Rather than book negative goodwill, the buyer reports a gain on the purchase.
Make accounting a forethought, not an afterthought
M&A transactions and the accompanying financial reporting requirements are uncharted territory for many buyers. Don’t wait until after a deal closes to figure out how to report it. We can help you understand the accounting rules and the fair value of the acquired assets and liabilities before closing.
