Business Funding

Is The EIDL Advance Taxable?

Did you receive an EIDL advance when you applied for your SBA EIDL loan? This post is for you!

Here is a hypothetical question from an EIDL recipient…

I have an S corporation with eight employees. I applied for and got an Economic Injury Disaster Loan (EIDL) advance of $8,000 from the Small Business Administration (SBA). I didn’t get a Paycheck Protection Program (PPP) loan.

Is this taxable? Does this impact my tax deductions?

Answer

We don’t have any official guidance on these issues related to the EIDL advance payment. But we’ll give you our opinion based on what we see in the law.

EIDL Advance

The CARES Act allowed the SBA to provide up to $10,000 as an emergency advance that you don’t have to pay back to the government, regardless of whether you get or reject an EIDL. You apply for the EIDL emergency advance when you apply for an EIDL.

The SBA decided to limit the EIDL emergency advance to $1,000 per employee, up to a maximum of $10,000.1

Income

You have income for federal tax purposes if you have an undeniable accession to wealth (which you clearly realized with the EIDL emergency advance) and over which you have complete dominion (it’s your money).2

Since there is no obligation to repay your EIDL advance, it generally is taxable income to you.

But there is an administrative exception, called the general welfare exception, which allows you to exclude from your taxable income some payments made by governmental units under a social benefit program.3

The IRS usually makes determinations on specific types of general welfare payments in a revenue ruling. And here’s good news. The IRS has consistently held that payments made to taxpayers due to disasters fall under the general welfare exception and aren’t taxable.4

Because the COVID-19 pandemic is a nationally declared disaster, it’s likely the general welfare exception will come into play and make the EIDL advance not taxable to you.

Of course, we would like the IRS to put its official stamp on a general welfare exception to the EIDL advance. And we would like this specific guidance soon.

Deductions

In Q&A: Are PPP Loan Forgiveness Expenses Deductible?, we explained that the IRS concluded expenses that create PPP loan forgiveness are non-deductible for two reasons:5

  1. The payments are allocable to tax-exempt income, making the expenses paid with the PPP money non-deductible.

  2. Deductions for otherwise deductible payments are non-deductible if you receive a reimbursement for those payments.

If the EIDL advance is taxable, then the above wouldn’t apply, and you would deduct all your otherwise allowable business expenses.

If the EIDL advance is non-taxable (much preferred), we don’t think any of your business expenses paid with the EIDL advance money become non-deductible under the PPP loan forgiveness guidance because:

  1. You don’t need to pay specific expenses to get an EIDL advance, unlike PPP loan forgiveness, which is tied to payment of business expenses with a specific formula.

  2. There is no requirement to use the EIDL advance for deductible business expenses; for example, the CARES Act allows you to use the EIDL advance to repay obligations you cannot otherwise pay due to revenue losses.6

Once again, we hope the IRS will provide specific guidance on this soon.

Takeaways

Millions of small-business owners like yourself have received up to $10,000 in EIDL emergency advance funds that they don’t have to repay.

Here are our thoughts on the EIDL emergency advance tax treatment:

  • EIDL advances are likely non-taxable to you under the general welfare exception

  • You likely don’t have to reduce your deductible business expenses by the EIDL advance amount.

Just to reiterate—the IRS hasn’t given us any official guidance on the tax impacts of the EIDL advance. Let’s hope the IRS does that sooner rather than later.

Want to walk through these considerations?

Let’s set up a time to talk here.

~ Chad Pavel, CPA


Disclaimer: The bill has recently passed the Senate and we are learning more every single hour about how this bill will be implemented and the interpretations of each component. For the most up to date information and FREE Analysis based on your situation, set up a time here.

You Got The PPP! (But Be Careful)

You got the PPP? Congratulations!

But you need to be careful now that you have the funds.

Why?

There are many “Tripwires” within the PPP and SBA loan documents that you need to be aware of so you don’t end up owing a big chunk of money to your bank or SBA in 2 months…

This IS a loan.

Forgiveness is NOT automatic.

You have to make sure you follow very specific steps.

And no - it’s not automatically forgiven if you use it for payroll.

What makes it complicated?

  • The importance is gigantic as you might have to pay it back

  • You got 10 weeks of payroll but you have to spend it in 8 weeks

  • There are going to be requirements for documentation

  • Are you spending it fast enough, if not, it won’t be forgiven

  • How do you organize the other cash you have to extend your timeline for 9 months instead of 2?

  • You’re currently competing with 50,000/yr unemployment if you want to hire people back. What if employees don’t want to come back?

Want to walk through these considerations?

Let’s set up a time to talk here.

-Chad


Disclaimer: The bill has recently passed the Senate and we are learning more every single hour about how this bill will be implemented and the interpretations of each component. For the most up to date information and FREE Analysis based on your situation, set up a time here.

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LaunchDarkly Raises a $54M Venture Capital Round

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Source: Pitchbook.com.

LaunchDarkly, the provider of a feature management platform for software development teams, has raised $54 million in a venture capital round led by Bessemer Venture Partners. Founded in 2014 and based in Oakland, Calif., the company has raised around $130 million in VC financing to date, including a $44 million round in March 2019 that valued it at $288 million. LaunchDarkly's customers include IBM, Microsoft and Atlassian.

From the Launch Darkly Website

Eliminate Risk & Deliver Value

LaunchDarkly enables development and operations teams to deploy code at any time, even if a feature isn't ready to be released to users. Wrapping code with feature flags gives you the safety to test new features and infrastructure in your production environments, without impacting the wrong end users.

When you are ready to release more widely, simply update the flag status and the changes are made instantaneously by our real-time streaming architecture.

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Additional Investors Include:

Redpoint Ventures, Threshold Ventures, Uncork Capital, Vertex Ventures US, Bloomberg Beta

About Pinewood

Pinewood provides venture capital consulting, pitch deck design, investment teasers, and mergers & acquisitions consulting for high growth companies and investors.

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Wipro Ventures Raises $150M for Tech-Focused Fund

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Source: Pitchbook.com.

Wipro Ventures, the corporate venture arm of India-based IT giant Wipro, has raised $150 million for its second namesake vehicle. The fund will be used to help the firm continue investing in tech companies, with a specific focus on verticals such as cybersecurity, financial services and cloud infrastructure. Founded in 2015, Wipro Ventures raised a reported $100 million for its inaugural fund. The firm has backed 16 startups to date.

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From the Wipro website:

Wipro Ventures bridges the gap between emerging startups and enterprise customers.  Established in 2015 as the strategic investment arm of Wipro Limited, we invest in early to mid-stage companies building innovative enterprise software solutions.  As a leading technology services provider and trusted advisor to Global 1000 enterprises, we provide our portfolio companies access to a broad customer base across the world.  Wipro’s deep relationships with Global 1000 clients gives us a better understanding of customer needs and market trends, enabling us to provide valuable guidance to our startup partners.

About Pinewood

Pinewood provides venture capital consulting, pitch deck design, investment teasers, and mergers & acquisitions consulting for high growth companies and investors.

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Top Five Ways to Finance a Business Acquisition

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Looking to Buy a Business and Need Financing? This Post is For You!

If you are looking at businesses for sale near you or how to finance a business acquisition using an acquisition loan, then this is for you. Don’t worry! Even if you don’t have millions of dollars in the bank there is still a solution to help you buy your first business. Let’s jump in.

Most people think that the only way to finance a big business acquisition is to go to their local bank and take out a loan for the total purchase price, borrow, the money, and buy the business.

Well...it is rarely ever that easy…

While you may be able to obtain a bank loan for a business acquisition there are a number of other more creative ways to finance your business acquisition, other than a typical bank loan.

#1: Seller Note

Many business owners who are looking for a business buyer will be open to financing a portion or even 100% of the agreed-upon purchase price of the business themselves.

While there are a number of ways to structure such a deal, the most common method is to have the business seller effectively grant the buyer a loan (otherwise known as a seller note or take-back financing) where the buyer effectively pays the seller back in monthly payments similar to a bank loan.

In this case, the buyer and the seller will execute an actual note or loan agreement between the two parties that define the payments and the terms in a similar fashion to a bank loan.

The business acquisition seller note financing will have terms such as a number of payments interest rate, default provisions and many other terms that will protect both the buyer and the seller throughout the duration of the note.

It is very common for a seller to finance 20-50%, and even as high as 100% of the purchase price using this method (in fact…our CFOs have negotiated such deals in the past).

#2 Seller Financing Through Commissions or Performance

If the seller leaves the business in a short period after the transaction tease plays another common method for seller financing is to have the buyer of the business pay the former owner or current seller effectively a commission on the agreed-upon purchase price based on a percentage of revenue profits or cash flow over time.

This is different than a seller note where the buyer agrees to pay the seller of the business a certain number of payments over time and actually treats the financing as a loan.

Financing through commissions or performance is more desirable for buyers and less desirable for sellers since there is no formal obligation to pay a fixed dollar amount over time like a seller note.

However, if it’s structured properly both parties can win and settle the debts for the purchase price more quickly especially if the buyer is able to increase sales and cash flow or quickly and the current owner could ever do

This is common and professional services businesses and other underperforming businesses where the current owner is neglecting or failing to operate the business as efficiently and profitably as another business owner or the new buyer could.

In the end, you pay off the agreed-upon purchase price over time on a flexible basis that helps you buy more of the business equity over time and pay back the owner for their hard work.

# 3 Private Investors

The third way to finance a business acquisition used to use private investors to contribute equity or debt into the deal.

Particularly if you are unable to obtain traditional bank financing to buy the business there’s always the offer to bring in outside investors to find a portion of the deal using equity or debt instruments.

Many entrepreneurs have left investment banking consulting big private equity shops to form small funds using their own and some private investors’ capital to identify and execute the acquisition.

In fact, the appetite for business acquisition is increasing exponentially amongst private investors since the current stock markets in venture capital markets around all-time high valuation and small businesses as a whole are thriving more than ever.

So if you happen to have a network of wealthy individuals who can support you and your business acquisition by funding you with equity this can be a clear path to buying your first business using OPM.

#4: Traditional Bank Loans

We always recommend entrepreneurs building relationships with local bankers as possible so that they can have loans and credit products available to them when they go to launch or acquire their next business.

And while every bank has a different appetite for business acquisitions and different specialties it is widely accepted that a well-researched business acquisition in a strong in a growing industry has a great chance of being funded by a traditional bank.

Common banking products used to execute a business acquisition include a business line of credit, a personal line of credit, a home equity line of credit, commercial term loans, equipment financing, and SBA loans to name a few.

One of the most popular and favorable options is many times the SBA loan. SBA loans offer up to 10-year loan terms for business acquisition and working capital loans and are a great option to buy a business.

If you were on sure how to approach your banker to discuss business acquisition financing recommend starting with your local business banker today.

#5: 401K ROBS

One of the least understood and least utilized start-up acquisition financing vehicles available to people today is the 401(k) ROBS financing option.

Over 30 years ago the IRS created the option for entrepreneurs to take existing funds in their retirement accounts with their prior employers and allow them to roll those funds into their newly formed companies to invest in startups real estate and business acquisitions, including their own businesses.

Our partners at Guidant Financial have a thorough 401(k) ROBS conversion service that allows entrepreneurs to find their business ventures using money that they currently have invested in stocks bonds and ETFs with their employers.

Disclaimer: We recommend you speak with your financial advisor and CPA before initiating any retirement account changes.

However, if you consider that you’ve been investing your retirement funds into stocks bonds and funds of companies that you have never met and had zero control over it may make sense for you to finally be able to invest your hard-earned savings into your own business venture especially if you know what you’re doing and you are confident that you will be successful.

Summary

We hope this article has been informative and educational for you understanding how to finance your next business acquisition.

If you were driven and you have identified a great business acquisition opportunity in an industry that you understand no well and can succeed in then you should be able to craft a business acquisition offer that suits the goals of the current seller and you and your family.

Start forming relationships with bankers private investors attorneys and accountants to identify your next big business acquisition opportunity and make sure that you have your financing options prepared so that you can add quickly and executed deal when the right opportunity arises.

Good luck and be well!

Chad Pavel, CPA