As we settle into our 2nd month of social distancing, we have had time to reflect on what has occurred since the start of the crisis. As with all major economic and global events, we are constantly trying to understand how we got to this point and in turn, what does history provide as a roadmap of what to expect moving forward.
Let us be clear, we are in unprecedented waters and this sudden and immediate draw down of the global economy due to a pandemic is certainly a unique event that we have not encountered in our lifetime. From an economic standpoint, what makes this event so unique is that we are experiencing both a demand and supply shock to the global economy. But while the circumstances relating to the sudden shutdown due to a pandemic might be unchartered, we can turn to history to find a few other examples of when we had both a demand and supply side shock.
Over 100 years ago, the world was faced with another pandemic, the Spanish Flu. Some of the same measures that we are currently putting into place today were used back then as well. Social distancing, wearing masks, etc. In addition to the pandemic, America was also dealing with the end of WWI and the return of troops back from Europe. We saw a gradual return to normal following the control of the pandemic and consumer confidence took months to take hold where consumers were finally comfortable enough to go about their daily lives. The pandemic slowed down the post-war recovery but what followed from that pent-up demand and supply chain led to the roaring 20’s and a period of great economic prosperity.
In the early 1940’s this country was thrust into WWII. During the build up to the war and over the course of the conflict, over 11% of our population was sent off to fight. This turned consumers into soldiers and the focus of the country went toward the war effort. One of our responses to this crisis was to turn to a non-traditional workforce, women. Additionally, capitalists and manufacturing companies were forced to repurpose their efforts to making necessities like tanks, airplanes, and guns. Similarly today, we are seeing a major shift in the workforce. Through modern technology, alternative workforces are being created through virtual offices, curbside pickups, home delivery services, etc. And of course, we are once again seeing American ingenuity in repurposing some of our manufacturing efforts toward the production of medical equipment, personal protective equipment and sanitizing systems.
The third example in recent history was the 1973 oil crisis. The crisis exposed our dependence on foreign oil and its control on our society. It left Americans waiting hours in line for gas, disrupting productivity and severely slowing down the US economy. This crisis ultimately put us on a path toward securing energy independence and moving from an oil importer to an oil exporter. Similar to the oil crisis, this virus has put a spotlight back on our dependence of foreign manufacturing for critical goods, specifically in the area of healthcare supplies and medications. Look for a post-virus push toward bringing more manufacturing back to the US that will not only create more jobs post-virus but also help shore up our supply chains to ensure our national security.
We are certainly in the midst of what will hopefully be a once in a lifetime event. But what history tells us is that American capitalism, grit and ingenuity typically leads to advances and growth post-crisis.
Our CPS Team is committed to helping both our clients and community get through these uncertain times. If you, or someone you know, needs assistance, please be sure to reach out. Our advisors are working around the clock to answer all your money questions: email@example.com
Michael A Riskin | CPA/PFS, CFP®, MST
Vice President | Treasurer | Partner
Considering my relatively young age of 31, it might surprise you that I have lived through not 1, not 2, not 3, but 4 “once in a lifetime” events that have affected the U.S. Stock Markets. While all four events were unique in their own right, they are a reminder that facing adversity is not necessarily unique, and may not be “once in a lifetime.”
When I was 1 years old, the “Oil Price Shock” was big news. The price for a barrel of oil spiked during this time period and created uncertainty that rippled through the U.S. Stock Markets. During the 1990’s we saw the first negative year in the S&P 500, -3.1%, after eight straight positive years!
When I was 10 years old, the “Dot-com Bubble” nailed the market. The enormous demand for anything with “.com” in the business name created a bubble around technology stocks. Unfortunately, we all know what happens to bubbles…they pop! When this happened, the U.S Markets declined for 3 years in a row! Between 2000–2002 the S&P 500 return was -9.1%, -11.9%, & -22.1% respectively. Ouch!
When I was 19 years old, the subprime mortgage crisis culminated in the “Great Recession.” We all remember this one! The imbalance between risk and reward created an environment where banks were lending money to anyone willing and able to sign papers. When this bubble popped, the S&P 500 recorded a -37% return in 2008. Again, ouch!
Now I’m 31 years old, and currently living through the “Coronavirus Crisis” from COVID-19. Luckily, I’m in a profession that can work from home, and work with a company willing and able to adapt during this crisis. Across the globe, schools, businesses, and social life have shut down while we witness history from the safety of our homes. At the time of writing this article, the S&P 500 has dipped roughly -14% for the year. If that number holds to the end of the year, that would make this only the third worst S&P 500 year since I was born.
While writing this article from home, I’m holding my nearly 1-year-old daughter in my lap. She is currently living through her first “once in a lifetime” market event just like I did when I was 1. Ironically, there is also an “Oil Price Shock” but this time, it is in the opposite direction. I don’t have a crystal ball, but if my 1-year-old daughter could understand me, I would tell her that this is not the first crisis to hit the U.S. markets, and it certainly won’t be her last “once in a lifetime” event. We have been through adversity before, and if history repeats itself, the U.S. economy will eventually rebound and continue to thrive.
Sterling J Searcy Jr | CPA
Senior Tax Advisor
Last week we urged all small businesses and some self-employed (Form 1099) individuals to continue to apply for the CARES Act programs, such as the Paycheck Protection Program (PPP), in preparation that more money could become available. The bill to add additional funds to the CARES Act programs passed the Senate this week, with speculation that it will pass the House on Thursday. The act as it is then expected to be signed by the President.
How Much are We Talking?
If passed, this bill would add $500 billion more in funds to the CARES Act, including, but not limited to, over $360 billion in additional PPP funding, another $10 billion in EIDL funds, and $100 billion for hospitals. Additionally, funds for ancillary health items & testing have been made available. On April 16th, the original $350 billion for the PPP loans ran out, leaving thousands of small businesses confused and frustrated. Some small business still haven’t heard back from their bank institutions at all, leaving some to speculate that they have been approved, but not yet notified.
So What Do I Need to Do Now?
Whether you’ve already filed and are waiting to hear back from your bank, or you haven’t filed just yet, it’s best to make sure your application is complete to ensure you have the best chance at getting these funds. A lot of banks are only working with their current clients, so now is the time to quickly build a relationship with your local branch, possibly your local community bank, to help increase your chances. It’s better to put in the work now in hopes these funds become available, than to scramble after they do. We’ve put together a checklist of documents your bank might request, so gather these before heading to your bank. And don’t forget to bring your completed application. If you believe your application has already been approved or submitted, be sure to call your banker and ask for an update.
What if I Already Received the PPP Loan? How Do I Track the Spending?
Great question! Just because you’ve received the loan, your work doesn’t end there. You’ll need to track the spending and prove you used the funds for its intended purpose which includes mostly payroll expenses. Use our PPP Reconciliation Schedule to perform a bank reconciliation at the end of the 8th week and tie your general ledger account to the bank statement.
What Other Resources are Available?
The Lakeland Chamber of Commerce has put together a robust list, but if you’re feeling overwhelmed by all the options, or are unsure of which programs you qualify for, don’t hesitate to contact us.
We’re Here to Help
The CPS Team is committed to helping everyone during these uncertain times. If you, or someone you know, needs assistance with the PPP loan application process, please reach out to one of our Financial Advisors: firstname.lastname@example.org
Don’t go at this alone. We’re all in this together.
Michael Scott | MBA, CFA
Senior Portfolio Analyst
The Payroll Protection Program (PPP) became available for self-employed individuals and sub-contractors on April 10th. However, recent amendments have been made in regards to application and qualification. These changes come in a line of updates to the program since its launch in March. The Small Business Association PPP is now on its second round of funding, and 1099 individuals are still urged to apply for the PPP loan.
Lenders required small businesses to submit their 2019 tax returns along with other key payroll data as part of the original approval process for PPP funds. Form 1099 individuals will need to also submit their 2019 tax return, but specifically, Schedule C, to show profit and loss for the company. Other sources of income may be required for gig work, etc.
Unlike small businesses that typically keep track of payroll each pay period and file taxes timely, people paid via Form 1099 may not be calculating this information until tax time. Getting your finances in order before visiting with your lender is most important to ensure you receive the appropriate level of funding to keep your business alive. Separate guidance exists for businesses created in 2020. Read the FAQs here.
Another problem self-employed individuals face is that their business income typically becomes co-mingled with their personal checking/savings. This creates quite a problem for lenders to verify income and revenue sources specifically for the business. It is best to keep business income separate under the business name. When receiving PPP funds, this would be another great reason to start tracking it properly.
But How Do I Track the PPP Funds?
One way is to create a separate bank account dedicated for the PPP loan. This account is used for the sole purpose of reimbursing the appropriate covered cost over the 8-week period.
Let’s say you receive a PPP loan of $10,000. You decide to set up a separate bank account and corresponding general ledger accounts to hold these funds. The 8 weeks pass and during that time you have been incurring the following qualifying expenses and drawing from the PPP bank account to pay for the following:
$ 8,500 – Payroll Cost *
$ 1,000 – Covered Rent **
$ 500 – Covered Utilities **
After the 8 weeks the PPP bank balance is now $0.00. Perform a bank reconciliation at the end of the 8th week and tie your general ledger account to the bank statement. We’ve provided a useful spreadsheet below to do just this. In this example, bring the following to your lender to apply for loan forgiveness:
(A) PPP loan bank reconciliation
(B) PPP loan bank statements
(C) Payroll registers/reports that tie to the $8,500
(D) Copies of covered rent payments that tie to $1,000
(E) Copies of covered utility invoices that tie to $500
(F) List of employees and compensation levels over the 8-week period.
(G) Lease agreement in place before February 15th 2020.
The CPS Team is available to anyone with questions or needing assistance. Let us know how we can help you: email@example.com
* Covered payroll costs are capped at $100,000 per employee on an annual basis.
** For services and lease agreements in force before February 15th, 2020.
Note: In this example, rent and utilities combined are less than the non-payroll cost limit of 25%.
Note: Different lenders may require different/additional reports for loan forgiveness.
Note: Note: This spreadsheet is a free tool for small businesses and Form 1099 individuals. Be sure to check with your accounting department or CPA for any changes needed to best suite your business.”
Derek M Oxford | CFP®️ | AEP®️
Download the spreadsheet: PPP Reconciliation Schedule
Staying calm during times of crisis is nothing new to those who have worked in the public sector – in fact it is a job requirement. However, we are currently experiencing a worldwide crisis on a scale that most of us have never experienced. The Coronavirus pandemic has changed the world we live in, upending our lives as well as the global financial markets. In addition to the stress of worrying about the health of your loved ones, you have the added stress of worrying about the steep decline in the value of your investments. This is especially troubling for those who are retired or nearing retirement. The best investment strategy in times of extreme volatility is to do what you have been trained to do and remain calm, and don’t even consider changing your investments! We have learned throughout our careers that decisions based on emotion are usually poor decisions that we later regret. The market will recover in time, and though nobody knows how long that will take, history teaches us that it will recover. Don’t let fear drive you to make bad financial decisions.
Required Minimum Distributions (RMD)
The SECURE Act, which took effect on January 1st of this year, changed the age for starting RMD’s from 70-1/2 to age 72 for those who had not yet reached age 70-1/2 prior to that date. Additionally, in response to the Coronavirus crisis, our government passed the CARES Act which provides financial relief on several fronts including suspending the RMD requirement for 2020 for IRAs and defined contribution retirement plans such as 401(k), 403(b), and 457(b). This also applied to inherited IRAs! For CPS managed accounts held at Fidelity, if you are receiving periodic/recurring distributions, these will continue as scheduled unless you contact your advisor and request a change. If within the past 60 days you made a 2020 RMD, you may be able to return the RMD to your account. Talk to your advisor to see if you qualify, and this does not apply to inherited IRAs. Those with accounts held at custodians other than Fidelity should contact your advisor since each custodian is implementing these changes differently.
FRS Investment Plan Members
Required minimum distributions are waived for 2020 for Florida Retirement System Investment Plan members, so RMD payments will not be made automatically for 2020. If you were required to receive an RMD payment, and still want to receive it, you may request that by calling the Investment Plan Administrator at 1-866-446-9377, Option 4, or by logging into MyFRS.com.
IRS Stimulus Payments
You may qualify for a stimulus payment of up to $1,200 (or $2,400 for married couples) authorized by the CARES Act. Direct deposit payments started going out April 9th, and should start arriving in taxpayer accounts by April 14th. Paper checks will take a bit longer, maybe as late as September for some taxpayers. Lower income taxpayers will receive their checks first. Qualification for the stimulus payments are based upon your 2019 tax return, or if you haven’t filed it yet, your 2018 return. The method of payment is also based on the method you received your refund on that return. But what if were not required to file a return for 2018 or 2019? Non-filers who receive Social Security retirement, disability (SSDI), or survivor benefits, or receive Railroad Retirement and Survivor Benefits, don’t need to do anything– the IRS will send your stimulus check by the same method. However, non-filers who receive one of these benefits and have a qualifying child under age 17, can apply for an extra $500 per child. Those who are not required to file a tax return, and do not receive the above listed government benefits, to file for the stimulus payment.
Tax Filing Deadline
As part of the CARES Act, the IRS extended the deadline to file and pay your 2019 income tax until July 15th, 2020. The deadline to make 2019 IRA and HSA contributions is also extended until July 15th, 2020.
Waived Early Distribution Penalty
For those adversely affected by COVID-19, the 10% early distribution penalty is waived on distributions of up to $100,000 (total) from most workplace retirement plans and IRAs. Also, you can choose to pay the federal income tax on the distribution over a 3-year period. However, you should talk to your advisor prior to taking early distributions.
Rick Bernard | MBA
Right now, our world is consumed with the impacts that COVID-19 is having on our health and our economy. So many have lost their jobs and are struggling to make ends meet. You may have experienced a financial hit in recent weeks, and it could mean that you need to reevaluate your own budget. In this time of financial uncertainty, it can be empowering to take control over your finances. Taking action now will relieve stress levels and will set you up for success in the future.
- Building Your Emergency Savings Fund
This season of uncertainty is why an emergency fund is critical. Having three to six months of living expenses is recommended, but if you aren’t there yet, now is the time to make a plan.
You may need to scale back on the non-critical spending, especially if you are currently out of work. You may find that continuing to cut this type of spending out of your budget, even after you are back to work, will help you reach your emergency savings goals quickly and efficiently.
Call your mortgage institution, student loan provider, credit card companies or even your utility services to ask if they can extend your payments. This can prove to be a powerful option. Pushing the pause button will allow you to build up your emergency savings.
- Consider Refinancing Your Loans.
Now, more than ever, may be a good time to look at refinancing your loans. The Federal Reserve lowered interest rates to 0%. When this happens, you may be able to lock in lower payments over 10, 15, or even 30 years due to lower interest rates. If you can find a lender that has low closing costs, the option of refinancing may benefit you. If you need help finding a lender, contact your advisor.
If you have credit card debt, now might be the time to look into consolidating them, if the interest rate is lower than what you are currently paying. Another option is to look for credit cards offering a 0% interest rate to roll over the balance and pay it down more aggressively. You would want to make sure that the rate is set for its entirety and not just a few months. After paying off the card, make it a point to avoid using it. The spending habits are what you want to get control over, so that you don’t find yourself in the same boat again.
- Look for Other Sources of Income
While there are companies that cannot keep their doors open due to the virus, there are many well known organizations that are ramping up hiring. Here is a list of 30 major US Companies currently hiring. If you can pick up some extra work on the side, it can help boost your savings even faster.
- Stay Connected
Actively connecting with people is a great way to collaborate and build relationships. It’s also good for your mental health to stay connected whether that be phone calls or virtual meetings. Look for groups on social media that share in the same interests as you. Follow and comment on posts and like photos that you find interesting. Call or video chat your friends or family. Share your own story and start conversations to get people to share their ideas. Create a space where you can share your skills, values or experiences.
- Do Not Touch Your Investment Balances
It is always recommended to invest consistently, and many people are doing this by contributing to their retirement plans at work. Right now, checking your investment balances daily will send your emotions on a roller coaster ride. There is no successful science to “timing” the market. Instead think of “time in” the market as your strategy. With the markets fluctuating the way that they have the last few weeks, you’re taking advantage of the opportunities to buy more. Think of it this way, when are you more likely to spend money at a department store? When there is a sale or when everything you want is full price? Right now, you are getting the sale price!
The impact of this virus is different for all of us; it looks different and it feels different. Taking control of your finances can be an emotional lifesaver, and we hope that these tips can help to alleviate any stress you are feeling. Most importantly, here at CPS, we hope that you and your family are staying safe and healthy. We’re in this together.
Tamara L Fales
Retirement Plan Advisor
By now, numerous versions of how to apply for the Payroll Protection Program (PPP) or Economic Impact Disaster Loan (EIDL) in relation to COVID-19 have been pushed out either in newsletters, emails, or social media.
The purpose of this article is not to explain the technical details, but to stop and think whether a business should apply for the bridge loans like EIDL, PPP, or take the appropriate tax credit from this pandemic. Let’s quickly explain them again.
The Families First Coronavirus Response Act (FFCRA) is a monumental program for small and midsize employers. The FFCRA will provide a 1:1 credit for the cost of providing paid sick and family leave wages to their employees kept on staff related to COVID-19.
Employee Retention Credit (ERC): a refundable credit for qualified businesses equal to 50% up to $10,000 in qualified wages (March 13-March 31) and 50% of qualified wages paid during the 2nd quarter of 2020 on Form 941, 941-SS or 941-PR. This credit is for those employers that had to partially or fully shut down due to governmental orders, also seen as businesses with a significant decline in gross receipts compared to 2019. A great connection the FFCRA has is that the ERC ties into the already existing Emergency Paid Sick Leave Act (EPSLA) and Emergency Family and Medical Leave Expansion Act (FMLA). Those wages paid for the EPSLA or FMLA are fully refundable under the ERC.
For sole-proprietors, the IRS has specific provisions to allow for certain tax credits to apply in relation to the above, but the periods in question will be April 1, 2020 through December 31, 2020. This tax credit is instead applied to self-employment tax rather than wages paid to employees.
This program has a neat provision for an advance of $10,000 to provide economic relief to qualified businesses experiencing a temporary loss of revenue due to the effects of COVID-19. Even though the name says “loan,” this advance does not need to be repaid. Funds have been provided in days; a fair turnaround compared to traditional private loans from banks. Ensure the use of these funds qualifies under the act, but more can be available under the EIDL if necessary. Just understand the loan provisions to pay it back.
This program allows for 2.5x the average monthly gross wages paid during 2019 (or the last rolling 12 months or a seasonal average depending on the business). You must also keep the same average number of full time employees (FTEs) determined on February 15, 2020 through June 30, 2020. At least 75% of the funds need to be used for payroll and the other portion to be used for rent/utilities. If not, the excess becomes a loan at 1% due in two years.
Putting It All Together
For small business owners, what does it all mean? Which program is best? How will they receive the most money or best opportunity to survive during this time? This is where professional advice comes in. Sit down with your CPA, banker, or trusted advisor. Discuss with them about the pros and cons of each program to determine how to proceed. It’s also important to note that the tax credits first touted won’t be available for those businesses that take these special loans or grants. No one is talking about that.
A sole-proprietor with a low wage base may just need the advance of the EIDL to cover outstanding business costs. A business that had to completely close down due to the governmental orders may see that they need the PPP to keep their employees from making more during unemployment with that extra $600 flat weekly pay from the CARES Act vs what the business owner was paying them (hence a need to pay them more to incentivize them to stay loyal). Do not just look at these programs as “free money” because the specifics for their use are well defined.
When the first program for businesses came out, the EIDL seemed like a great loan opportunity at the time. Then, the PPP came out, and it seems like a no brainer. A business owner can lean on a financial professional to make the right decision for their business. No one wants to end up owing money they didn’t anticipate or not receiving as much as they needed because they applied for one over the other.
Contact us for support. Lean on your trusted advisors to help navigate you through a not-so-seemingly easy opportunity. We’re here to help.
Derek M Oxford | CFP®️ | AEP®️