CLA provides a financial market overview to discuss tax and wealth advisory strategies for the second half of 2020 along with updates to the Paycheck Protection Program (PPP).
- Clayton Bland, Chief Wealth Advisory Officer, CliftonLarsonAllen Wealth Advisors, LLC
- Brian Ream, CFP®️, Principal, CliftonLarsonAllen Wealth Advisors, LLC
- Jack Rybicki, CLA Managing Principal of Industry, Real Estate
In case you missed it:
Questions and Answers:
Are there any investment opportunities I should consider during this downturn?
It is a great time to reconsider your asset allocation and risk tolerance. The best time to plant a tree was 20 years ago. 20 years from now we will probably be thinking the same about investing today.
How should future inflation influence our investments?
Inflation could be a concern at some point due to how much money is being created in the system. Historically, equities and hard assets such as real estate can provide some protection.
Do you believe the jobs have actually been "lost" or are they temporary stalled with the state stay-at-home orders in place?
Job loss claims are usually based on non-ag unemployment claims. Those sheltering in place while employed are not included in those numbers.
Yesterday, the Vanguard Long-Term Corporate Bond Index Fund ETF Shares VCLT Bond Fund dropped by over 2%; is this indicative of any anything?
Hard to read far into one day's price movements. Longer-term bonds are more sensitive to day to day movements in interest rates and hence move up and more than other bonds.
Can leftover proceeds from a PPP loan be used for weekly bonuses for employees?
We believe you will be able to pay bonuses if they stay under the $100K limit. We are still waiting on more forgiveness guidance.
Are we allowed to use our rent payment to our property company as part of our PPP forgivable utilities?
We are still waiting on more guidance on intercompany rent treatment.
If you do not use the entire loan in eight weeks, do you just pay back what you did not use?
Unforgiven portions will convert to a loan – there is no prepayment penalty.
We make monthly payroll tax deposits. Should we make our monthly payroll tax deposits on a weekly basis in order to meet the "incurred and paid" rule?
The guidance still needs to clarify incurred and paid.
With the changing rules and definitions, should we consider giving the loan funds back to avoid public ridicule and threats of litigation?
We understand it is frustrating as they try to draft and administer a $600 billion program quickly. We recommend working with your legal counsel to document the basis of the loan once guidance is available.
Can someone hire their spouse if they fall short of the 75% mark?
We need forgiveness guidance before we can determine strategies. “Incurred and paid" needs to be defined before we can advise one way or another.
When is guidance expected?
We thought it would by last Friday, May 8 and are still being told to expect it any day now.
Is there any further guidance on whether we need to schedule a special payroll to pay salaries through last day of our eight-week period?
Nothing yet. We are waiting on guidance from the Small Business Administration (SBA).
Our employees contribute 25% to their own insurance coverage and 100% for their spouse’s coverage.Can we cover 100% of all premiums with the PPP funds during the eight weeks?
We believe that would be a good strategy to consider, especially as we get more forgiveness guidance.
If employees are paid once a month and we received our PPP funds on April 16, will we have to do a mid-month payroll to get those payroll expenses counted toward the 75%?
We need to wait to understand what "incurred and paid" means in the forgiveness guidance.
If we only use 60% of PPP loan amount toward payroll and payroll expenses, and 10% for utilities, will 70% be forgiven?
We need a better definition of the 75%.
What taxes are payable with PPP money?
The employee side of taxes.
Incurred and paid is still the rationale.
Are life insurance and long term disability an allowable costs?
Right now, we believe just group health, vision, and dental are allowable costs.
If the sole proprietor of a PLLC takes regular draws at the same time as employee paychecks, can he be paid up to $1,923 per week with PPP funds?
They can be paid, but it won't necessarily count as forgiveness.
Can you pay ahead on employee benefits and include them in the forgiveness portion of the loan?
People are considering strategies around bonuses or pre-funding 401(k)s. We will know more when we get forgiveness guidance and will need to watch the $100K limit but it is a consideration.
Do you have to track each employee for both the prior period and the eight-week period to prove that they all are still employed?
Full-time equivalent count is important. Be sure to read the FAQ which discusses if you offer an employee their position back and they decline – there is some relief.
Our payroll is paid tomorrow for the period of April 19 through May 2. Can we include this in the forgiveness calculation or do we start with hours worked from the day we received our loan?
Currently the guidance is "incurred and paid". While your forgiveness period would begin the date you receive your funding, we need to understand “incurred and paid” in the forgiveness guidance to understand if timing of payroll payments is impacted in your forgiveness calculation.
If an employee voluntarily quits during the eight weeks after you get your PPP, is that held against your FTE?
You need to offer them the job or re-hire. If you laid them off and they won't come back you can get relief.
Any guidance on PPP loans less than $2 million and determination of eligibility at time of application?
We recommend documenting eligibility at the time of application regardless of loan size. We should get more guidance through an interim final rule.
Can I use more than 75% for payroll?
Does "access to capital" mean the owner’s personal wealth is included in the need for the loan funds regardless of a requirement to fund a business?
It very well could. It is factored in. We suggest working with your legal counsel and making sure you fully document your position.
Is there a way to contact the SBA directly, so I can find out whether simply having a large available line of credit makes us ineligible to keep PPP funds?
Each state has a district director. Go to the website and look them up or contact CLA and we can help provide contact information to the SBA.
What is the requirement for justifying spend for self-employed/Schedule C individuals who received PPP (since they don’t have 941s to prove it is being used for payroll)?
You will be limited to $1,923 per week. There is a formula for Schedule C forgiveness.
Can we use the PPP loan to provide a bonus to employees?
Yes. You will want be aware of the $100K limit per employee.
We received our loan on April 9 and issued payroll checks dated April 10 for hours worked in the last part of March. Can this payroll be included in our eight week period or is it excluded because hours were worked prior to loan?
It is currently unclear. Watch for forgiveness guidance to define incurred and paid.
When the Main Street Lending Program will be available for Businesses?
We have heard it will be in a couple weeks.
Where can we find the formula for Schedule C forgiveness?
Check the SBA FAQ document or talk with your CPA.
Is the $1923 a weekly figure something that should not be exceeded on a weekly basis, or can we average it over the eight weeks?
It appears the calculation is average, but detailed guidance is not out.
Does an EIDL loan affect our PPP loan?
You can use both programs as long as the funds are used for different expenses.
When will forgiveness determinations begin to be processed?
After the eight weeks (56 days) end. Banks also need the forgiveness guidance to be able to create their forgiveness considerations for borrowers. You have to submit to your bank and they have 60 days to decide.
Is it allowable to increase retirement contributions (or other benefits) during the eight weeks of PPP spending for the purpose of reaching the 75% threshold?
Great planning idea. We believe this would be ok.
Does our unused line of credit make us ineligible for PPP?
We suggest that you document why you need it and have a discussion with your legal counsel.
Has there been further guidance issued regarding what transportation expenses qualify for forgiveness under utilities?
Further guidance has not yet been released.
If someone makes over $100k in a calendar year are they not eligible for PPP money at all?
Yes, but wages are capped at 100K per person
Are part time employees subject to rehire as well?
Yes, you will use an FTE formula.
We started paying our employees 75% of their salary in mid-April. We should be back to paying 100% before June 30. How does this fit into our forgiveness calculation?
If you pay the 2019 401(k) amount that is due, can that be claimed?
It is unclear. The guidance is incurred and paid.
Does profit sharing for 2019 and 2020 made in the eight-week window get forgiven?
2020 will be forgiven. 2019 is not clear, as it needs to be incurred and paid.
Is there any clarification on the 75% for restaurants that include tips on the W-2?
We are worried the extra wages will be paid and then not be qualified for forgiveness. It is unclear, but a major consideration.
If you are still waiting for your funds, is June 30th the deadline for having to use the funds?
You have 56 days or eight weeks to use your funds.
How do you interpret the eight-week period in relation to incurred and paid? If you received funds on April 28 and payroll is paid on the 15th and 30th of each month, is the entire April 30 payroll an allowable expense for PPP dollars?
We suggest you track your daily pay during those eight weeks. We need further guidance to clarify.
I am using 30 hours per week as 1 FTE employee. Is this the recommended amount? Or will SBA use a higher number like 40 hours?
We are using SBA historical guidance until we hear anything further – 30 hours per week.
Do we have to prove what we used the $10,000 EIDL for?
EIDL is a grant. It may be used only to pay fixed debts, payroll, accounts payable, and other bills that could have been paid had the disaster not occurred.
Are Common area maintenance charges (CAM) charges included with rent for PPP?
Many rent questions still need to be clarified.
Does the forgiveness calculation use FTE or head count?
To calculate the FTE do you use only worked hours or does it include non-worked hours also?
It should be based on hours worked.
If 2020 profit-sharing amount isn’t paid until after 2020, how could I pay it, and how much should I pay?
It is currently hard to determine. Current guidance is incurred and paid. We suggest waiting for further guidance and focus on the payroll portion for now.
Does the eight-week period for PPP start at SBA approval or bank funding date?
Can PPP proceeds be used to pay accrued vacation time not used by employees?
Yes, as long as they are wages.
We received funds April 16 – what is the last day to spend funds?
Day 1 is April 16th, then day 56 would be your last day.
Should the basis for measuring expenses be cash or accrual?
We will need to wait until the guidance defines "incurred and paid".
Should we change our pay processes to pay out more money in benefits or bonuses?
It could be a good strategy, so long as you mind the $100K limit per employee. We do not suggest changing payroll process at this time, but track the incurred payroll and see what numbers get you and evaluate upon getting further forgiveness guidance.
Can you pay out vacation and pay wages, as long as you do not go over $100K calculation?
Yes, we believe this is a good strategy.
What we talked about:
Rohen: Good afternoon to our CLA family, clients, community partners, and friends. Welcome back to our 14th livestream. We are so grateful to have you here with us. As always, your health and safety are our number one priority. Today we’ll be focusing on a COVID-19 market and economic update with Clayton Bland and Brian Ream, but first, we’ll get the latest update on the Paycheck Protection Program (PPP) loan forgiveness from Jack Rybicki.
Let’s jump right in with Jack; can you take a few minutes to talk about the latest releases and guidance in FAQs since last Thursday’s session?
Rybicki: Sure. Here are a few updates:
- Program Round 2 report released
- $176 billion of additional guarantees approved through May 1 consisting of 2.2 million loans – average size of only $79k, down from over $200k in round 1. Only 21,000 new loans over $1M (7,600 over $2M), with nearly 1.6 million loans of $50k or less.
- FAQs 40 – 45 have been published since our last livestream on April 30
- FAQ 40 — Additional borrower relief related to rehire/maintain wages test if borrower tries to hire a previously terminated worker back and they decline offer. Requires borrower to have made a written offer for comparable wages and documentation of rejection.
- FAQ 41 — clarifies that a seasonal employer electing to use alternative loan sizing period can still qualify for PPP eligibility
- FAQ 42 — clarifies that nonprofit hospitals exempt from taxation under section 115 of the International Rescue Committee (IRC) is also eligible for PPP participation
- FAQ 43 — extended “safe harbor” date from May 7, 2020 to May 14, 2020. States that guidance on how Small Business Administration (SBA) will “review” certifications made by borrowers regarding expanded “economic uncertainty” certification (see FAQ 31) will come out prior to May 14, 2020
- FAQ 44 — confirmed that the affiliation rules apply to both U.S. and foreign affiliates. However, this new guidance created ambiguity as to which employees are included in the headcount for purposes of the applicable size standard. Specifically, by omitting any reference to “employees whose principal place of residence is in the U.S.,” FAQ #44 seemingly contradicts prior FAQs and interim final rule statements that indicated that the size standard for PPP loan purposes only counts employees whose principal place of residence is in the U.S.
- FAQ 45 — clarifies that a borrower that returns loan proceeds before May 14, 2020 is eligible for the CARES Employee Retention Credit
- Interim Final Rule (IFR) on corporate groups and non-bank and non-insured depository institution lenders
- Provides new guidance that a single corporate group cannot receive more than $20M of PPP loans in the aggregate, effective for any loan that was not fully disbursed as of April 30, 2020
- IFR on nondiscrimination and additional eligibility criteria
- Clarifies applicability of nondiscrimination rules to nonprofit organizations, including religious entities
- Clarifies that student workers generally count as employees for eligibility headcount unless students are working under a federal or state work-study program — excludes work students from both headcount and from average monthly payroll used to size loan
Rohen: Jack, thank you for the update. I’d like to progress to our key topic today - We are thrilled to have Clayton Bland, CLA’s Chief Wealth Officer, and Brian Ream, a Principal in our Wealth Advisory group, with us today. They are here to give us a market update and to talk about tax and wealth advisory strategies for the remainder of 2020. The global pandemic has certainly affected financial markets and investors all over the world. Clayton, what is your message when you talk to clients?
Bland: Right now, a lot of people are asking, why is the market going up when the news seems so bad? It’s certainly been an eventful 2020 so far.
Ream: Really, the best way to sum up what has happened is to look at it in 3 phases. The First phase started early in March. This is the event phase, like when an earthquake or natural disaster hits. We are in a state of shock. In this case, it was not a natural event – but a deliberate attempt to turn-off the economy. We experienced a pretty dramatic decline. The S&P 500 dropped 35%.
There’s a saying that markets go up as an escalator and down as an elevator. We were on the elevator down.
Rohen: Where are we now in the process?
Ream: Well, I think March 23 becomes the inflection point. It was the end of phase one and the shock and the selling of securities. Phase two was marked by “OK, we just had the event, let’s pause and see what damage we sustained. Phase 2 is damage assessment and a lot of uncertainty. Where we are now.
In phase three, we’re seeing wildly different opinions on what will happen next. Will we have vaccine? Will we have a double dip recovery? From March 24 through the end of April, we recovered 30% — could that be a new bull market? Many have wildly different opinions. Our next step: figuring out where we are now in the new reality and what do we do next?
Rohen: How is this moment different from previous financial downturns?
Bland: It’s interesting to compare it to the 2008 financial crisis. We had a massively greater shock in a much shorter time relative to the 2008 crisis. That drawn out period of the 2008 crisis was a massive slowdown with a muted recovery.
Today, this shock to the system and GDP is greater. But the recovery to get back could effectively be much faster than in 2008. That was essentially a four year recovery to get back to where we were.
But now, in 2020 – we turned on the faucet for growth. It was intentional, very steep. We’ve seen a pretty overwhelming policy response from the Fed. Consensus is starting to form around a Nike-shaped swish as the GDP recovers and builds back to its previous high.
This is predicated on a number of factors, of course – if there is a resurgence of the virus or if the vaccine takes longer than expected. But the way Wall Street is interpreting it, we may see a faster recovery.
Ream: The initial shock was four times as bad as the 2007-2009 period. But the long term implications for our GDP could be significantly less. This is not 2008. We all have a tendency to look back to the most recent crisis.
In 2008, we were in a pretty over-leveraged positions. Banks were overleveraged. We had risky derivative products being traded on the market. Corporate profits and cash balances were light.
In 2020, we are in a different situation. We had a healthy system, low unemployment. A positive outlook, overall. The biggest difference is the policy difference. Back in 2007, there was a pretty tepid response from the Federal Reserve. There was a concern of pumping too much cash in too quickly. There was a measured response from the Fed.
Another saying: You don’t bring a knife to a gun fight. This was a gun fight and in 2020, our Fed brought a canon. Over the month of March, we saw more than three times the fiscal response than what we saw in 2007.
Rohen: What, specifically, is the Fed doing, and how will it affect individual investors?
Bland: As a point of reference, when we think back to policy response, we are seeing Quantitative Easing – the ability of the treasury to print money and provide liquidity by going out in market and purchasing assets.
The original round of QE in 2009 was approximately $80 billion/month. Today, in this crisis, in QE 4.0, it has been $80 billion a day. A dramatic response. You heard Warren Buffet say that the market is saying that the Fed is doing “whatever it takes, squared.” Because of the complete stop of the economy, it warrants this response from the central banks.
Even Fed Chairman Powell is saying that we have every resource and will use every tool until we see an impact on inflation and recovery in employment. We could recover and be back at pre-crisis levels in a shorter time compared to 2009.
The Fed is now buying mortgages and municipal bonds. That safety net that the Fed threw out really gave people a sense of security – the markets are going to continue.
Over the previous decade, 23 million jobs were created over the course of the expansionary period. We’ve effectively wiped out all of those new jobs in a month. That is a shocking data point when you think about it. Why is the market doing so well and recovering like it is with that many jobs lost? It’s important to note that the market is forward looking. We know that things are bad. But the market is looking at what the future might look at — where the economy gets turned back on.
Rohen: It’s hard to look forward when the news is full of the market volatility every night. Who should we listen to?
Ream: is it a light at the end of the tunnel or is in an oncoming train? We have very little consensus about many things. We don’t know what earnings will look like. We don’t know how to value things. The market is not based on where things are now, but at where things will be in the future.
Don’t get too hung up on things that you are reading on Yahoo Finance and Marketplace. Right now we have everyone sharing their opinion and they are not necessarily meaningful.
Year to date, we’re off 9.9% – 10%, which is a pretty garden variety decline in the market. A lot of people get caught up and lose perspective and can feel like it’s the end of the world as we know it. But it’s not.
Rohen: What are some specific actions we can take to help weather this turbulent time?
Bland: The underlying theme is high quality.
- Focus on consistent, stable year-over-year earnings growth. Focus on companies with history of growing their dividends, with consistent dividends. Focus on high quality companies. Add additional high quality exposure to large and mid-cap U.S. and developed ex U.S. stocks with low financial leverage and high return on equity
- Technology — focus on technology and health care in a post-COVID-19 economy. The large tech companies have consistent business models with strong balance sheets and cash. Carefully selected bio tech, med tech, pharma will continue to benefit from the current scenario
- Add investment grade corporate bonds, which will be supported, both directly and indirectly, by the Fed’s newly established credit facilities
- Emphasis on quality debt credit ratings
Ream: we are going to be emphasizing quality. Quality in cash flows, balance sheets. We are emphasizing U.S. growth and developed markets. There is a tailwind fear about emerging markets.
Rohen: what about tax or financial planning strategies?
Bland: A few thoughts:
- Real estate: One thing people should be considering is real estate. When we think of a very low interest rate environment – all money moved into U.S. treasuries. Reducing Fed Fund rate – the interest you earn on cash is effectively zero. Money is eventually going to find a home. We believe in high quality real estate space – that will be an asset space that will attract capital. Unknowns with office space, but warehouses, multi-family apartment – all are still opportunities.
- Dollar cost average out of cash: If you are deploying cash, it makes sense to dollar cost into the market. Hard to pick exact timing. Invest cash on a consistent basis
- Roth conversions are still attractive.
- Loss harvesting. If you owned Walmart and could sell at a loss and turn around and buy Target at the same time. Realize and take that loss
- Charitable giving deduction – part of CARES act. Previously a cap – but a new benefit in the tax law change.
- Planning inventory – look at your estate documents. Anything with family planning or mortality planning, putting together a will. Most people have not done a good job of taking care of those documents. A pandemic makes us realize how important that is.
- Opportunity zone investments – we’ve heard about them for the last 18 months. We think that is still an advantageous investment vehicle. You can defer capital gains, take proceeds and invest into a real estate project. That gain will be effectively tax free. With all of this new borrowing that the treasury is instituting, there is a belief that to get back and reduce this debt, it will be coupled with higher tax rates in the future. Investing in an opportunity zone and having the investment grow tax free could be useful in the future.
Rohen: Thanks so much for joining us today. Clayton, Brian, and Jack, we really appreciate your time. Please join us next Tuesday for more information about where things stand and what we now know related to the PPP and any new legislation. If you have questions, please visit our COVID-19 landing page at claconnect.com. Until next week, please stay healthy and safe.
The purpose of this presentation is purely educational and informational. It is not intended to promote any product or service and should not be relied on for accounting, legal, tax, or investment advice. The views expressed are those of CLA Wealth Advisors and intended for a broad audience. They are subject to change at any time and do not take your individual circumstances into account. Past performance does not imply or guarantee future results. Investing entails risks, including possible loss of principal. Diversification cannot assure a profit or guarantee against a loss. Investing involves other forms of risk that are not described here. For that reason, you should contact an investment professional before acting on any information in this presentation. See our full disclaimer here: https://www.claconnect.com/general/wealth-advisors-disclosures
- Webinar: Market, Economic and PPP Update