How COVID-Related Programs Impact Your Tax Liability

As part of SALON TODAY's Burning Questions issue, April McDaniel, CPA, CRSP, with Kopsa Otte Associates tackled some of our readers' toughest questions:

SALON TODAY: How are all these COVID-realted programs going to impact my tax liability this year? 

McDaniel: It depends. We are still waiting for some answers to critical questions. 

Here's what we know for sure:

• Unemployment benefits are taxable
• State and local grants are taxable as the federal level. States decide what they want to do individually. 

We still need answers to the following: 

• Will expenses paid with the Paycheck Protection Plan (PPP) loans be deductile? Currently, they are not. 
• Will forgiven SBA loan payments be considered income? 

What happens if you didn’t have taxes withheld from your unemployment benefits or if you had a PPP loan in your business and the expenses are not deductible?  What if you received a State/Local grant that is subject to Federal income tax or SBA loan payments are forgiven?

The scary part about all these questions is that each one increases your Federal tax liability.  In a year when many are struggling, it seems unbearable to be straddled with additional tax liability on benefit programs meant to help keep you afloat.

What can you do?  Two things:

• Talk to your State Senators.  Email them. Call them. Write them.
• Talk to your CPA about how to plan for your tax liability. You may not like the “what ifs” but at least you’ll be prepared.

SALON TODAY: Have you started submitting Paycheck Protection Plan loan applications for forgiveness? 

McDaniel: Kopsa Otte is in various stages of helping clients apply for forgiveness on the PPP loans. There are a few smaller banks that are already accepting and processing loan forgiveness applications. The majority of our clients’ banks are holding off on accepting applications until final guidance is issued.  The rules keep changing.  Our goal is to help our clients achieve full forgiveness while subjecting them to the least amount of stress as possible. None of us need any more of that this year. That is about the only thing that is for certain. In general, as of 10.2.2020, we think it’s best to wait to file for forgiveness until more guidance is received.

SALON TODAY: I'm considering changing my commission or hourly based pay salon to booth rental. Can that work financially for me? 

McDaniel: 

I know that this question is weighing on many salon owners. It’s really about the numbers.  For those owners in high rent areas it’s very difficult to make cash flow.   You don’t just have to think about rent.  Make a list of all the monthly expenses that will still exist post transition, add in what you want your profit to be plus any debt payments. Now divide that by the number of chairs you have.  That’ll give you a rough estimate on the amount you must rent the chairs for to make your desired profit.  Don’t forget to factor in tax.

The reality is as an owner, you need to think about more than just the numbers.  Moving from a team environment with an established culture to a landlord/tenant relationship takes systems and a commitment to making big operational changes. Think about a strip mall.  The stores that rent space in the strip mall don’t get instruction from their landlord on how to dress, take care of customers, when to show up at work and on and on.  Nope.  The tenant writes a check to the landlord and then hopes mostly not to hear from them unless they need them to fix something.

Lots of things to think about here.

Kopsa Otte Disclaimer: Because every situation is different, it is important that individuals seeking specific advice contact a professional advisor. The info provided does not constitute legal, tax, accounting or financial advice and is offered as an informational service only. No liability whatsoever is assumed in connection with the use of this info.