What's Next for Manufacturers? Planning and Forecasting in a COVID-19 Era
For manufacturers, 2020 has been one long slog of wondering, “What do we do next?” As businesses head into the fourth quarter – facing year-end planning pressures while simultaneously managing through a pandemic – the answer to this question may be more important than ever before.
From leveraging existing tax legislation to putting specific operational strategies in place, there are a handful of tactics that can help.
Review CARES Act Tax Changes
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law by President Trump on March 27, 2020, and included key provisions that can help manufacturers qualify for immediate refunds of previous taxes. A few of the most important include:
- Net operating loss (NOL) carrybacks: The Tax Cuts and Jobs Act (TCJA) was signed into law Dec. 22, 2017, and impacted NOLs. Due to the TCJA, NOLs generated in 2018 or later could not be carried back to prior tax years and could only be utilized in a subsequent year. Additionally, the TCJA placed an 80% limitation on the amount of the NOL that could be utilized in any given year. Under the CARES Act, NOLs from 2018, 2019, and 2020 can be carried back up to five years and the 80% limitation is repealed.
Given how well many companies were performing in the years leading up to the pandemic, it’s quite possible that those prior years will have income tax liabilities that can generate refunds when current losses are carried back. On top of that, your business will have the added advantage of carrying back the loss into years with higher tax rates.
- Temporary repeal of excess business loss limitations: The CARES Act temporarily repealed a TCJA-created limitation on non-corporate taxpayers using more than $250,000 ($500,000 in the case of married couples filing jointly) of business losses to offset non-trade or business income. The TCJA statute mandated that if a flow-through business generated a loss, the taxpayers’ ability to offset other income on their personal return was capped at those amounts. The CARES Act amends this statute so it is effective only for tax years beginning after Dec. 31, 2020.
- Bonus depreciation for qualified improvement property: The CARES Act includes a fix for a drafting error in the TCJA that kept leasehold improvements from qualifying for bonus depreciation. If you’ve made certain improvements to the interior of your building after the passage of the TCJA, you may be able to claim a tax refund by filing an amended return or filing a change in accounting method on a current tax return.
- Deferral of employer’s social security payments: Also included in the CARES Act is the ability for employers to defer payment of the employer portion of Social Security payroll taxes (6.2%) for payroll tax deposits due during the period from March 27, 2020, to Dec. 31, 2020. The deferred employer payroll taxes are due in two equal installments: 50% by Dec. 31, 2021, and the remaining 50% by Dec. 31, 2022. Initially, there was concern about the ability to participate in the PPP loan and simultaneously take advantage of the payroll tax deferral. Subsequent guidance has clarified that businesses can have a PPP loan and participate in the Social Security deferral.
Revisit Payroll Protection Program (PPP) Loan Obligations
As 2020 comes to an end, businesses need to keep in mind three key aspects of PPP loans.
- As written, the CARES Act ensures that the forgiveness of a PPP loan is excluded from a business’s gross income. However, current guidance from the IRS (Notice 2020-32) is that expenses are not deductible to the extent they are paid with the proceeds that are not includable in gross income. Members of Congress have stated that this was not the intended result of PPP loan forgiveness, but Congress has yet to pass legislation to address this issue. Consult with your tax advisor about how to treat expenses paid for with PPP proceeds.
- The issue of deductibility raises an additional question regarding the timing of the forgiveness of the PPP loan and what to do if it crosses into a subsequent tax year. It’s very possible that a business could submit an application for forgiveness in the fourth quarter of 2020 based on 2020 expenses and not have a determination regarding forgiveness from the SBA until 2021. There is currently no guidance from the IRS or the SBA on how to report such an issue. Consult with your tax advisor to determine the proper treatment for these expenses on your 2020 and 2021 returns.
- Proper management of PPP loans has also become a critical issue during transactions. Throughout the pandemic, sellers and buyers have been left to wonder whether the PPP loan should be repaid and what, if any, notifications or approvals were needed – either to the SBA, the lender, or both. The SBA’s newly released guidance on PPP loans and changes of ownership provides some clarity for loan recipients and potential acquirers on how to move forward with their transactions. This guidance should be reviewed carefully as deals progress in the coming weeks and months.
Focus on Improving Cash Flow Management
Maintaining adequate cash flow to sustain operations is likely a significant risk for many companies in this COVID-19 economy. However, there are tried-and-true processes that can help minimize business interruption.
- Understand your customers’ outlooks: You can’t forecast your cash flows accurately without putting thought into the challenges facing your customers. What are their pipelines like? How are their businesses performing?
- Forecast projects for 2021: How do you make sure that your business will secure cash inflow? Consider trade credit insurance to guarantee some of those receivables in the event your customers are at high risk. Understand your customers and protect yourself.
- Grow your sales, but cautiously: Don’t overcommit in ways that can leave you profitable on paper with no cash on hand.
- Controls on spending: Don’t micromanage, but make sure you are in a position to get value out of the money you are spending. If you are cash-tight, work with vendors to arrange favorable terms.
- Plan ahead: Once you have cash flow analyses for multiple weeks, plan ahead for the weeks you know you will come up short. Build monthly projections and, ultimately, a multi-year business plan. Remember, disruptions must be navigated thoughtfully but they are usually temporary. This too shall pass!
Whether your manufacturing company is still in survival mode or transitioning into recovery, employing these tactics can mitigate the financial impact of the COVID-19 pandemic – and take you one step closer to what’s next.
The results are in from the 2020 Indiana Manufacturing Survey: COVID-19 Special Edition. Learn how Hoosier manufacturers are weathering the pandemic.