If your California business has suffered a significant or complete loss of income due to COVID-19, you’re far from alone.

Time-tracking and shift scheduling service Homebase published their findings of how the first few weeks of forced closures impacted small businesses that use their service. They have also developed a real-time tracker of hourly work at U.S. small businesses. Their data suggests that by Sunday, March 22, 45% of companies nationwide were not operating on average, with the number closer to 60% in some major cities.

Even as lockdowns in some Californian counties are starting to ease, it will be a long time yet before many of these businesses can resume regular activity. The CARES Act provides options for business owners to negotiate the terms of their business loans with their creditors.

You would be eligible for debt restructuring without falling under the category of a Troubled Debt Restructuring (TDR) if you are a debtor facing any of the following difficulties, as outlined in the Account Standards Codification (ASC) 310-40:

  • The debtor is currently in payment default on any of its debt, or the debtor would probably be in default in the foreseeable future without the loan restructuring.

  • The debtor has declared or is in the process of declaring bankruptcy.

  • There is substantial doubt about the debtor’s ability to continue to be a going concern.

  • The debtor’s securities have been, or are under threat of being, delisted.

  • Based on the debtor’s current capabilities, it will be unable to service all of its contractual debt payments.

  • Without the loan restructuring, the debtor could not obtain other financings on terms equal to those available to non-troubled debtors.

You would also need to fulfill these additional requirements as outlined in The CARES Act below:

  • The restructuring request is directly related to loss of income from COVID-19

  • The loan is not more than 30 days past due as of Dec 31, 2019

  • The restructuring is implemented within 60-days of the end of the national emergency, or by Dec 31, 2020

However, these measures don’t currently mitigate Federal tax implications of a significant modification to the terms of a loan. Currently, the IRS and the U.S. Treasury Department have not provided guidance that will relieve issuers and holders of outstanding debt instruments from severe tax consequences that could arise as a result of the widespread forbearance and loan payment accommodations related to COVID-19.

It is crucial for you to fully understand the methods in which your loan can be restructured as it is up to both the creditor and debtor to agree. This is generally done so that the impact on federal income tax is minimized for both parties.

Adjustments to the terms of a loan that can result in tax implications

  1. Deferral of Interest – A material deferral of interest payments is considered a significant modification. If an interest payment is deferred until some date after the maturity of the debt, whether the postponement is a considerable modification will depend on the facts and circumstances such as “the length of the deferral, the original term of the instruments, the amount of the payments that are deferred, and the period between the modification and the actual deferral of the payments.”
  2. Deferral of Principal Amortization – A deferral of principal amortization would be considered a significant modification under the same conditions for a postponement of interest.
  3. Extension of Maturity Date – An extension of the maturity date would be considered a significant modification under the same conditions for a deferral of interest.
  4. Reduction of Interest Rate – A reduction of interest rate is a significant modification if the yield of the modified debt (the difference between the adjusted issue price of the unmodified debt and the scheduled payments of the modified debt from the modification date) is higher than 5%.
  5. Forgiveness of Interest for the period – The forgiveness of interest can have tax implications, depending on if the loan is a cash or accrual basis. Forgiven cash-basis interest may not be considered COD income; however, there is more complexity for an accrual-basis loan, which has already accrued interest in the first months of the calendar year.
  6. Reduction of Principal Obligation – A reduction of principal will cause a significant modification if the change in yield of the modified debt exceeds the greater of 25 basis points and 5% of the return on the unmodified debt instrument.

If you’re unsure about how to go about negotiating the new terms of your pre-existing loan, consider bringing on the services of a financial consultant.

California businesses look to Greenough Group to manage their COVID-19 loans, accounting, and expenses

The COVID-19 pandemic has a lot of moving parts, and financial policies are continually shifting. Though some lockdowns are being eased, there is no telling if we’ll see further waves of illness, or when we’ll be able to reach a state of normality finally.

Along with your pre-existing business loans, you may also be juggling your Paycheck Protection Program loans or SBA Disaster Loans. With so much financial uncertainty, having a part-time accountant or CFO with decades of experience provides much-needed stability.

Greenough Group’s CFO consultants and accounting talent can help you manage your debt restructuring, and assist you with the following services during this trying time:

  • Financial and accounting oversight and management

  • Managing employee layoffs, furloughs or salary reductions and the associated finances

  • Managing finances to meet the requirements of an SBA Disaster Loan or PPP Loan and The CARES Act

  • Uncover and implement novel ways to cut your expenses

  • Documenting all loan expenses

  • Fielding your employees’ questions about financial matters

  • Updating employees on the rapid changes to the laws

We also encourage you to look into these further resources; California and the federal government are providing broad assistance to small businesses and employers impacted by COVID-19. This includes: