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Absorbing A Business Hit From COVID-19

The travel and hospitality industries are among the biggest early victims of the novel coronavirus pandemic, but the abrupt shutdown of the convention circuit has other commercial casualties, too.

Airlines, cruise lines and hotels are all hurting in the wake of measures to slow the spread of COVID-19. The economic ramifications are also hitting a variety of businesses outside these industries. Some sponsors of industry conferences, for example, were forced to cancel after vendors and panelists withdrew and attendees changed their plans. Many of those cancellations resulted from corporate restrictions on nonessential business travel. These restrictions often preceded government bans on large gatherings in order to enforce disease-fighting social distancing.

Businesses forced to shutter these events face real financial consequences, and their owners and managers are wondering what potential tax or other financial relief strategies they can pursue. The good news is that such strategies will inevitably arise. The bad news is that my colleagues and other financial advisers cannot yet offer specific guidance about what they are and how to access them. Most of the relief that is likely to be available eventually has yet to be agreed upon, and almost none of it is actually implemented so far.

This does not mean businesses cannot take useful steps in the meantime. To continue the example of businesses primed to sponsor industry events, the first step for event organizers will be to examine any applicable insurance policies. Many policies designed to protect against financial loss in the event of cancellation would reimburse vendors and sponsors, and might even cover the loss of income from the event for the organizing entity. But first, the insured party has to determine whether the cancellation is covered. For instance, certain policies specifically exclude events canceled due to “communicable disease.”

Even if communicable diseases are excluded, however, business owners should not consider this to be anything like the final word on the subject. I have fought my own battles with a recalcitrant insurer, and my experience leads me to suggest it is often worth pushing back. Does the policy actually exclude “communicable disease” in all circumstances? Is the cancellation even a direct result of “communicable disease” in this situation? If sponsors and attendees withdrew due to changes in corporate travel policies based on the fear or threat of disease, the disease may not have actually been present in significant levels at the conference location at the time the business called off the event. The situation may be more nuanced than insurers would care to admit.

Even if the insurer holds firm, businesses have nothing to lose by submitting a claim. The insurer will either honor it, deny it or offer to settle for some agreed-upon amount. If the business’s leaders are unsatisfied, they can retain legal counsel or complain to state insurance regulators. It is a safe bet that a lot of businesses will take this approach once we get past the acute stage of the pandemic in the United States.

Taking on an insurer takes time, however, and venues may be demanding immediate payment for the canceled business. Most event contracts include a clause that provides a lump-sum payment as “liquidated damages,” meaning no actual losses need to be specified, when bookings are canceled beyond certain deadlines. The venue gets to keep the money even if it can re-rent the space for the same or a better price than the original booking would have generated. Of course, in the current circumstances, this is almost certain not to happen.

Still, I would not advise businesses to rush to cut a big check to a hotel or convention center to compensate for a coronavirus-linked cancellation. Trump administration officials have said they plan to work on special relief for travel-related industries. Such relief may be conditioned on venues waiving or reducing cancellation fees and liquidated damage claims. Otherwise, the relief could act as a windfall for the venues while injuring other businesses. This is not the outcome Congress or the administration will want.

For now, it is impossible to know how the administration will structure any such relief. Businesses may find it more useful to try to reach another agreement with venues in the meantime. One sensible approach would be to ask a vendor to waive the cancellation fee in exchange for a new post-epidemic booking.

Organizations forced to cancel industry and professional events are only one example of how COVID-19 shutdowns will ripple through the economy. Many businesses of all sorts face even more immediate problems: how to pay employees, how to make rent or mortgage payments, and how to avoid falling out of compliance with loan covenants that could allow banks to cancel credit lines or call in outstanding loans.

The emergency relief legislation that the House of Representatives passed last week ignored President Trump’s call for a payroll tax holiday that would have run through the remainder of the year. Instead, it mandated paid personal leave for employees at any business with fewer than 500 employees. Only the smallest businesses, with fewer than 50 workers, could request exemptions for dire hardship. It also left it to the Internal Revenue Service and Treasury Department to figure out a mechanism to reimburse small and medium-sized businesses via tax credits or advance refunds. Identifying such a mechanism might take weeks or longer; many businesses are going to face difficult choices sooner than that. This approach also does little for workers who are self-employed.

The Small Business Administration is gearing up to make emergency loans of up to $2 million, at low interest rates and for terms up to 30 years. But those loans typically need coordination through state governments that can document disaster conditions on a county-by-county basis, as Oklahoma City broadcaster KFOR News 4 noted last week. Some state governments at the current epicenters of the outbreak, such as Washington and New York, may be too busy trying to control the spread of the virus in their populations to document economic losses and process local businesses’ applications for federal help. The risk is that by the time many businesses can tap SBA loans to get through the current paralysis, it may be too late to keep their doors open. Allowing local businesses to founder for want of immediate cash would deepen a recession that is growing increasingly likely, and slow the subsequent recovery.

Despite the uncertainty over how relief legislation will be designed and how quickly it can be implemented, some help is likely to come fairly soon via the IRS. It seems safe to assume that the personal and corporate tax payment due date of April 15 will be delayed. A waiver of penalties is also likely. Pushing back the deadline is a step that the Service routinely takes in specified localities for all sorts of natural disasters. The IRS might offer a waiver of interest too, although that step would likely require congressional approval. With interest rates at rock-bottom levels, interest is hardly a major concern anyway.

Business might receive a more immediate benefit if they are relieved of making payroll tax deposits. Depending on their payroll size, companies need to make these deposits anywhere from one day after paying employees to the middle of the following month. Relaxing the deposit schedule would essentially make an immediate interest-free loan from the government to the business. Yet there is a risk that the government might not be able to claim the money if a business subsequently fails. (The government has some protection, however, via its right to go after individuals responsible for making missed payroll deposits, even if those individuals are nonowners or do business through a corporation or limited liability structure.) A more relaxed payroll tax deposit schedule would be a backdoor way of providing some of the payroll tax relief that Congress has so far declined to produce through legislation.

Further down the line, we may see a rollback of some of the provisions of the 2017 tax law that are ill-suited to current conditions. That law prohibited business owners from using net operating losses to claim immediate refunds of taxes paid in prior year. It also limited the tax benefits of such NOLs that owners carry to future years. An emergency bill might let businesses take better advantage of losses for tax purposes.

We may even see some relaxation of the limit on deduction of state and local taxes for individuals who itemize their deductions. This would be a form of tax relief that would benefit mainly more affluent individuals in higher-tax jurisdictions. On the other hand, those are exactly the people that the government will want to encourage to open their wallets as much and as quickly as possible when the crisis passes. I would not be surprised to see something along these lines included in one of the relief bills, at least on a temporary basis (which could always be extended later).

A lot of this is speculation and guesswork. Our questions about the financial aspect of the novel coronavirus continue to far outrun our ability to answer them. Those answers will be forthcoming in due course. For now, the best approach is to take on challenges one day at a time.

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