Op-ed: Here are some action steps for small businesses that survived the Covid pandemic
- The pandemic and ensuing downturn has disrupted tax and retirement planning for small-business owners.
- Increase your compensation, tax withholding and retirement plan contributions.
- It's also time to get back in the stock market. And now is a good time to re-evaluate your liquidity needs.
Covid-19 has disrupted tax and retirement planning for small-business owners, especially those who focused on saving their businesses from the pandemic's fallout earlier this year. With some hard work, however, there is still time to get back on track by Dec. 31.
Here's a great example. After his business tanked this spring, one of my clients didn't take a paycheck for six weeks. To preserve cash, he also lowered the amount of his federal and state withholding tax and stopped contributions to his company retirement plan. Fortunately, in the past few months, his business has largely rebounded. And to his own surprise, revenue for 2020 will be higher than what he projected at the beginning of the year.
Now that he's flush with cash, he needs to make several pro-active adjustments, starting with his tax withholdings and retirement plan contributions. And because his profit sharing contribution is tied to his compensation, we are also adjusting his wages, making his pay retroactive to pre-pandemic levels so he can achieve the maximum benefit.
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Many small-business owners across the country are facing the same scenario. If you took similar steps this spring, there are some action steps to take between now and year-end.
First, increase your compensation, tax withholding and retirement plan contributions. Much like my client, start by restoring your wages and tax withholdings to their pre-pandemic levels. And work to evaluate your retirement plan savings.
If your business has recovered, there is still time to contribute before year-end. For 2020, the maximum contribution for 401(k) plan salary deferrals is $19,500, or $26,000 for those age 50 and over.
In my client's case, he needs to contribute an extra $3,250 by year-end to make up for the months he stopped his deferrals. We simply took his remaining six pay periods and divided into $3,250 to get him caught up.
For those making additional employer contributions, review the amounts you've contributed to your safe harbor, profit sharing and cash balance contributions on a year-to-date basis versus your original 2020 funding strategy. While qualified employer contributions are not due until 2021, I recommend acting now to avoid falling further behind. If not, you may be in a cash-flow pinch in early 2021 when both taxes and retirement plan contributions are due.
It's also time to get back in the stock market. By holding onto much of their cash this spring and summer, many small-business owners stopped investing any of their "after-tax" earnings, fearing every dollar would be needed to keep their businesses running. Unfortunately, the equity markets quickly rebounded in late spring and went on a tear — and these investors missed out on substantial gains.
Now is the time to re-evaluate your liquidity needs. Start by setting aside a reasonable amount of cash, or considering opening a home equity line of credit. These moves will provide you with a safety net without jeopardizing the long-term benefit of compound earnings from future investments.
Once you are comfortable with the amount, I recommend resuming after-tax savings using a dollar cost averaging strategy. This will work down the excess cash by making periodic purchases over time and reducing the impact of day-to-day market volatility.
Make some smart charitable donations. Despite the hardships of running a business, many owners sought to donate money to non-profit organizations in their communities to help the less fortunate weather the Covid-19 storm. One way to accomplish this goal is to gift appreciated stock. Instead of selling the stock and recognizing capital gains, a security can be donated for a deduction of fair market value, gains included.
For example, one of my clients wanted to support a local community organization that was providing rent and utility assistance to those in need. He had an oversized position in a well-performing stock that he wanted to reduce. So, instead of giving cash to the nonprofit, he donated the stock and was able to reduce his exposure while saving on capital gains.
This strategy achieved several goals – the client supported a local nonprofit during a time of crisis, saved on saved future capital gains and was able to take the cash he would have otherwise gifted and reinvest to diversify his portfolio by purchasing a new security in its place.
While we continue to wait for a Covid-19 vaccine, millions of small-business owners know this winter will present some challenges. By keeping daily tabs on revenues and cash flow, they can continue to run their businesses while funding their tax obligations and retirement plans. Now is the time to get those plans in place.
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