New laws, tax credits, and potential loans can be overwhelming during a time when jobs are shutting down and owners are trying to plan in an environment of uncertainty. The steps you take today as a leader in your organization will have impacts that will resonate long after the pandemic is over. Businesses do not have a playbook on navigating this pandemic but, historically, the best contractors have learned to adapt and survive in economic cycles - this will be no different.
The volume of information business leaders are currently dealing with can make it difficult to take the time and understand what steps are required to help the business survive, then thrive. Below we break down the steps every contractor should be taking now.
Managing Cash Flows:
There has never been a more important time to practice the art of the 13-week cash flow. Over the past few weeks Citrin Cooperman has been working with our clients to show the impact of job shut downs, layoffs, and slowdowns in collection of receivables has on the cash available to the business. A 13-week cash flow can be used as a tool to work with your bank and determine if and when you may be out of compliance with borrowing base calculations. Banks are more willing to work with contractors who understand their businesses and plan accordingly. Some other cash conservation steps you can take:
- Defer Mortgage Payments - Work with your bank on deferring you mortgage for three months. The majority of banks have been accommodating and are looking to work with their customers.
- Defer Rent - Determine a few options to defer rent and present it to your landlord. Spread the deferral onto the rent payments over the remainder of the year or ask to start in 2021.
- Work With Your Vendors - If you have cash available, many vendors are in the same situation and may be willing to negotiate. See if you can get a larger than normal discount for early payment.
- Keep Cash on Hand - Make sure your business has enough cash to handle the sudden increase in labor costs once the jobs are back online.
Obtain Financing Available
New laws recently enacted under the Families First Coronavirus Response Act and the Cares Act provide businesses some options on obtaining necessary funding:
- SBA Economic Injury Disaster Loan - This loan is limited to companies qualifying under the SBA size standards. The loan is $2m with 3.75% interest and is paid back in up to 30 years. This is a great option for smaller business as many contractors will not qualify due to the SBA size requirement. This loan can be approved through approved SBA lenders or the SBA
- Paycheck Protection Program (PPP) - This loan is the newest loan available and was signed into law as part of the CARES Act. To be eligible, businesses must have less than 500 employees or qualify under SBA size standards. The loan amount is determined using a calculation of average employee monthly costs times 2.5 capped at $100k per employee up to a maximum of $10m. The enticing part of this loan is that a portion may be forgiven dependent upon qualified costs incurred by the business during the covered period (eight-week period following loan origination). The portion that is not forgiven after eight weeks is termed out over two years with a 1% interest rate and with a 6-12 month deferral possible.
- Non-Traditional Financing - If your business can not qualify for any of the above, work with your advisor to find a non- traditional lender. While the interest rate will be high, it is an option to keep your company cash positive
Take Advantage of Tax Laws
Under the new acts there are numerous provisions that are meant to assist companies improve cash flow that our contractor clients are taking advantage of.
- Families First Coronavirus Response Act - For employees that have been exposed to COVID-19 or cannot work due to child-care issues relayed to COVID-19 there are options to pay these employees and receive payroll tax credits to offset the pay.
- Employer Payroll Tax Deferral - Allows (i) employers to defer 100% of the employer portion of payroll taxes and (ii) self-employed individuals to defer 50% of their self-employment taxes. This deferral applies to payroll taxes due for the period beginning on the date the CARES Act is signed into law and ending on December 31, 2020. Half of the deferred payroll taxes are due on December 31, 2021 with the other half due on December 31, 2022.This provision is not permitted for those taxpayers that have a loan forgiven pursuant to the 7(a) loan forgiveness program as added by this Act.
- Key Changes to the 2018 tax reform act, which enables taxpayers to claim additional deductions/losses for net operating losses incurred in 2018, 2019, and 2020, can now be carried back five years which can result in refunds for taxes paid in those previous years. The new law suspends (beginning in 2018 through 2020) the limitation of business losses and are no longer limited to $250,000 (Single) or $500,000 (Married filing jointly). Limitations on business interest has been changed from 30% of adjusted taxable income to 50% of adjusted taxable income (special rules apply to partnerships) and the new law enables entities to take bonus depreciation on qualified leasehold improvements placed after September 27, 2017.
Know Your Contracts
This statement may seem obvious but there are a few important items you need to address.
- Job Delay - Make sure you understand what notification you need to provide when a job site is closed down. Contractors need to consult their lawyer to ensure they are complying with the contract. In addition, it is important to know what the delay means with in the contract; is it simply an extension of time or is there overhead that can be added on in certain situations such as excessive mobilization or demobilization of your workforce. For these jobs, maintaining accurate job costs becomes critical.
- Prequalification of subcontractors - Unfortunately not every contractor will survive this downturn. Adhering to (or implementing) strict pre-qualification processes is important to limit your organization’s risk of hiring a failed subcontractor.
- Backlog - Work with your customers to understand which jobs will become either pushed or canceled. Certain sectors have been hit harder than others and will impact the timing of future development. Understanding your backlog will help planning for investment in equipment and people.
Difficult decisions are to come every day, and we hope the above information provides some simple suggestions to the complex problems you might be facing. It has never been more important to surround yourself with the right team of professionals to help guide you.