The Independent Investor: Small-Business Owners Run Into Red Tape
The $2 trillion Coronavirus Aid, Relief and Economic Security (CARES) Act has two programs that can help America's business owners to weather the COVID-19 storm.
The $349 billion, first-come, first-served loan programs have seen an overwhelming response from troubled small-business owners nationwide. The job is to get the money into their hands quickly.
The challenge will be to remove or amend a mountain of regulatory requirements that the Small Business Administration and the financial sector have had in place for decades. Adding to the confusion are the owners themselves, who are either not aware that there are actually two loan programs or aren't sure which to apply for.
The Economic Injury and Disaster Loan (EIDL) offers owners up to $2 million for working capital needs like fixed debt and payroll. The interest rate is 3.75 percent (1 percent less, if you are a non-profit) and the term of the loan can be up to 30 years.
There is an automatic one-year deferment of repayment. That means the first payment is not due for 12 months, although interest starts on the date of disbursement.
If you apply for the EIDL you can also apply for a up to $10,000 advance for working capital at the same time. This entire application can be done online and no additional documentation, like tax returns or personal financial statements, are required. The SBA claims that the $10,000 grant (which does not have to be repaid) will be on its way within three days after the application is filed.
The second loan program is called the Paycheck Protection Program (PPP). This loan can amount to as much as $10 million or 2.5 times the average monthly payroll costs of the company's previous year. The proceeds can be used for payroll costs, health insurance, salaries/commissions, rent and mortgage interest, utilities and other business interest incurred after Feb. 15, 2020.
In order to receive this loan, you need to apply through an SBA-certified lender beginning on April 3. This process can take several weeks. This loan, which may be partially forgivable, must be applied for by the end of June 2020.
The greatest potential benefit of the PPP loan is that the amount of the loan eligible to be forgiven is the amount you spend during the first eight weeks of the loan on group health insurance premiums and other health-care costs, payroll costs, rent (pursuant to a lease in force before Feb. 15, 2020), and utilities such as electricity, gas, water, transportation, telephone or internet access expenses for services. These expenses must have been in place before Feb. 15 of this year.
If it sounds too good to be true — wait — because there is a catch. In order for the amount to be forgiven, the company must maintain the same number of employees during a certain time period, for example, from Jan. 1, 2020, to Feb. 29, 2020. There are further stipulations involved, so be sure to read the guidelines of the PPP loan.
You can apply for both loans, but you cannot use the proceeds for the same expenses. Further, the up to $10,000 grant (EIDL) gets deducted from the forgivable portion of the PPP loan.
The potential demand for these loans by the roughly 30 million small businesses in this country could swamp the program. The government recognizes this and promises to replenish the well once it has gone dry. Congress is now working on another $250 billion bill to supplant the existing programs. But in the meantime, there appear to be all sorts of hurdles from the simple intake and processing side to questions of risk and security.
Banks, for example, are worried about the creditworthiness of these new customers. Loan officers like to lend to those they know, companies with a credit history with their department.
As such, from the bank's point of view, it would only make sense to grant those existing small-business customers priority in the loan processing. But that's not the program's intent.
And then there is the Financial Crimes Enforcement Network (FinCEN). Money laundering has long been a challenge. FinCEN has charged the nation's banks to develop and uphold an exacting process, which involves stringent background checks of every new client ever since the terrorist attack on the World Trade Center.
These know-thy-customer regulations, together with the processing time and credit checks, could mean months before approval is granted. Of course, that flies in the face of the congressional intent of the bill, which is get the money in the hands of small businesses immediately.
This week, the Federal Reserve Bank added its weight to backstop the programs. They have committed an additional $2.3 trillion to buy up these CARES loans like PPP and EIDL, as well as other fixed income financial securities.
Hopefully, between the Fed's actions, pressure from lawmakers, and the business public, the SBA and the banks that elect to provide loans, will work out the kinks. We are all counting on them to deliver. I think they will.
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The Independent Investor: How the CARE Act Changes Tax-Deferred Account Rules
Listen up, big changes have just occurred because of the newly passed CARE Act. Aside from the "free money" that 90 percent of Americans are expecting, important changes to your retirement accounts have been passed. These changes can save you a bundle in taxes while providing instant cash relief, if you need it.
Normally, if you need money from a retirement account, and you are under 59 1/2 years old, you are required to pay a 10 percent penalty, plus the income tax owed on your withdrawal. There are some exceptions to the rule and the CARE Act just added a big one. The federal government just eliminated that 10 percent penalty for any distributions from IRAs, employer-sponsored retirement plans, or a combination of both.
Individuals can withdraw up to $100,000 in 2020, as long as the withdrawal is "Coronavirus-related." That definition leaves plenty of room for interpretation. If you or a spouse or dependent have been diagnosed with the virus, you qualify. If you or your family have been hurt financially by COVID-19 as a result of being laid off, being quarantined, or reduced working hours, you qualify.
Those who have been unable to work because you have no child care, or if you own a business that has closed or operates under reduced hours, then you can take a distribution as well. In fact, Congress seems to be making this option available to most Americans who require some relief from the negative impact of the virus.
In addition, under normal circumstances when you take a rollover distribution from an employee-sponsored plan such as a 401(k) or a 403(b), the proceeds are subject to a mandatory withholding of 20 percent, but COVID-19 distributions will be exempt from this requirement. The IRS is willing to simply rely on your word that the distribution was virus-related.
There is even better news. Let's say you take out the money, which you will need to tide you over for the next nine months. After that, the economy begins to revive. You get your old job back. If so, the government is allowing you to repay or roll the money you borrowed back into your retirement account. You will have three years to do so. You can return all, or part of what you took out and repay it in a single lump sum, or in multiple repayments.
You will still need to pay regular taxes on whatever you take out this year, but the entire tax bill doesn't have to be paid in 2020. Let's say you do need to take $100,000 out this year. If you normally make $75,000/year in reported income, that will put you in the 12 percent tax bracket if married and filing jointly. But because of the distribution, you would be reporting $175,000. Your taxes would double. The government is allowing you to evenly split the distribution money into tax years 2020, 2021, and 2022, so you only need to pay taxes on one-third of that extra income each year.
For those who have been taking a required minimum distributions (RMD) from their tax deferred accounts each year, that requirement has been waived for this year. The provision applies to IRAs, SEP IRAs, SIMPLE IRAs, 457(b) plans and both 401(k) and 403(b) plans. Both account owners, as well as beneficiaries who are required to take stretch distributions from inherited IRA accounts, are included in the provisions.
What if you have already taken your RMD? You can return the money that was distributed to you in two ways. Simply write a check for the amount and put it back into whatever tax deferred accounts it came from, as long as you do it within sixty days of the distribution. If you took the distribution longer than sixty days ago, you could just consider it a coronavirus withdrawal and you can return the money anytime within the next three years.
There are plenty of other provisions in the CARE Act that I will discuss in future columns. If, in the meantime, you have specific questions, you know how and where to contact me.
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The Independent Investor: An Economic Game Plan
Now that Congress and the Federal Reserve Bank have fired the first salvo of relief spending, investors are wondering how long the trillions of dollars in aid will take to actually do something to alleviate some of the losses to the economy.
Administration officials believe that the cash payments to Americans should start arriving within the next three weeks. That said, most economists expect the country will fall into recession in the second quarter. That begins next week. No one knows how deep of a decline we will ultimately suffer, but suffice it to say, it will be a shock to most of us.
We can also expect a large, possibly a historical, jump in the unemployment rate; some say by 30 percent or more. If today's unemployment data is any indication (3.28 million new jobless claims) we are in for some bad sledding. Just about every economic statistic that we use to predict the economy should also take a huge hit. My hope is that if you are prepared for these developments, you can take them in stride.
Let's be clear: this is a self-inflicted wound to the economy. The nation needed to shut down, if even partially, to slow the spread of COVID-19. As such, we should bear the brunt of the damage in the second quarter, but we will not be out of the woods. As we enter the third and fourth quarters, expect more weakness, with the best case that by the summer into the fall; we could see a "transition" period.
Hopefully, if all goes well, the virus cases (and deaths) will have peaked by then, at least in the large metropolitan areas. That forecast is a bit "iffy" because it depends on a number of things. How long and how many states ultimately embrace a lock-down, and whether or not the shutdown is effective.
To date, because of the failure of the United States government to effectively respond to the disaster, we still do not know how many people are, or will be infected, or how and with what to treat them. In the midst of this uncertainty, President Trump wants us all to go back to work by Easter. Many health experts believe the president is speaking prematurely. If so, it wouldn't be the first time.
Given the timeline and best-case guesses of the economists and the Federal Reserve Bank, the third quarter should experience negative growth as well. By definition, two negative quarters in a row would qualify 2020 as a recession year. Exactly how negative the third quarter will be is anyone's guess, but the hope is that the losses won't be as bad as the second quarter. The unemployment rate may continue to increase, but then turn around by the fourth quarter as more and more Americans go back to work.
The fourth quarter is when we should expect things to improve. Economists are hoping that by the holidays there will be some reason for consumers to celebrate. By the first quarter of next year, we should see an upward explosion in growth as things get back to what I will call "a new normal."
Readers should be aware that the $2 trillion Federal spending bill that was passed this week is not a stimulus program. It is simply an attempt to partially compensate for the estimated $2.5 trillion in lost growth that the economy will suffer in the coming quarters. Likewise, the central bank's multitrillion-dollar injection of liquidity into the financial sector is not meant to stimulate, but only to provide support.
The question I ask myself is what will the economy look like next year after the pandemic has come and gone? Many on Wall Street expect that the government may pass another huge spending bill that will target economic stimulus. The question to ask is whether Washington can put aside partisan differences long enough to do so. Given the present high-level partisan divide in this country, despite the dangers of this pandemic, I wouldn't hold my breath. Stimulus is different from relief. In an election year, who knows if anything can be passed.
We will also be entering 2021 with a vastly higher deficit. Today, both the one-month and three-month U.S. Treasury bills are yielding below zero returns. In the coming months, it is possible that we will follow the rest of the world into a fixed income environment of zero interest rates across the spectrum of U.S. sovereign debt.
Although interest rates are expected to remain historically low, there is no guarantee that that scenario will play out. It is far too early in this new economic cycle to start making forecasts for next year, but given the number of unknowns we face, I would advise readers to keep an open mind as far as the future. Anything can happen in this new environment, where all the rules and records seem to be coming undone on a daily basis.
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The Independent Investor: An Old Dog Learns New Tricks
When I made that decision last Friday, I didn't think it would be a big deal. After all, I have worked at home before (when I was sick or recovering from one of my many surgeries).
But as I am in day four of this self-imposed isolation, I am learning that, at least for me, my work habits are going to need an overhaul.
As a self-confessed workaholic, who loves what he does, even the idea of working from home never attracted me. I love the give-and-take of daily work life in the office. For me, the employees are like an extended family and I miss seeing them. I feed on office life and it feeds on me.
Therefore, when researching the pitfalls of working remotely, I expected to read that the greatest risk in working at home was that you won't work at all, or, if you do, you work at a reduced pace. Imagine my surprise when I discovered the opposite occurred. Without the comings and goings of my office routine, there was no stopwatch to tell me to take a break, drink fluids, eat lunch, exercise or even when to put the computer away.
The interruptions that occurred (and that sometimes irritated me at the office), I now realize, were timely cues to take a break. A colleague needing to talk, or convey information, an assistant asking for clarity, a delivery, a meeting, even a loud noise, or one of the office dogs barking are now all absent. As a result, I work at a frenetic pace.
At first, I worked at the dining room table. Big mistake. At the end of day one my back and shoulders were killing me, and I had a headache from leaning down working on a laptop in a dining chair that sloped backwards. Since I don't really have an office set up, I moved to the kitchen counter the second day. Better, but still left something to be desired. Tomorrow I will experiment with an office chair I had sitting around and hope for the best.
Given that I was so busy yesterday, I forgot to eat lunch. I have also made a habit of working out at the local gym for an hour during the day. Obviously, that isn't happening. I could exercise at home, but so far, I haven't.
Given that I have the software/hardware and telecom equipment at home to access my office, I connect when I wake up, rather than do the things I usually do like exercise, meditate or take the dog for a walk. So yesterday, for example, I worked from 6:30 or so until 6 at night.
And remember I am an investment adviser with worried clients, hysterical markets and a constant stream of new and challenging developments to contend with on an almost hourly basis.
I have already begun to adjust. My seating situation is evolving and like Goldilocks I will certainly keep trying to find the ideal arrangement for my aging body. I have started setting a timer for work activities with an allotted amount of time to get up, walk around, and breathe.
Today, come hell or high water, I will exercise for an hour around lunchtime. As for my hours, well, I will rely on my spouse, and she on me, to keep our working hours more reasonable.
All in all, I am sure that I will adjust to working this way. Others, who are also experimenting with this alternative work style, will be sharing their "tricks of the trade" and before long, who knows, I may actually come to enjoy it.
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The Independent Investor: Chances of a 2020 Recession Have Just Sky-Rocketed
The one-two punch of a worldwide pandemic, plus the sudden sharp decline in energy prices have increased the odds that the U.S. economy could fall into a recession as early as this year. The fact that we still do not know the economic damage of the COVID-19, only increases the odds of a prolonged economic downturn.
At this writing, the number of cases and deaths attributed to the pandemic is growing, which is moving both consumers and businesses to dial back their spending on travel, conferences, large events and various work processes. As schools close, more and more parents are stuck at home instead of going into the office. This is also causing increased disruptions in productivity as companies begin to direct some of their work force to stay home. The recent government decision to bar travel from continental Europe doesn't help the economic situation either.
To be sure, none of the economic data so far reveals any impact from these actions. Unemployment still remains at a 30-year low. The economy is still growing moderately and, until recently, the stock market was celebrating record highs. However, all of those statistics are backward-looking.
One way to suss out how bad things may get in the future is to check out the nation's seaports. After all, 90 percent of world shipping goes through their ports, which provides a good read on world trade. The story from the seaport side is not encouraging.
The Los Angeles port saw cargo fall 23 percent in February and officials there see first-quarter volumes dropping 17 percent or more. The Port Authority of New York and New Jersey are expecting at least 10 out of 180 ship arrivals to cancel. That doesn't sound like much, but they are expecting far more cancellations than that. In Texas, the Port of Corpus Christi, which is the largest source of U.S. oil exports going overseas, is now expecting big cutbacks in their business thanks to the decline in oil prices.
The Federal Reserve Bank was worried enough last week to have instituted a 50-basis point cut in interest rates and has promised to do more if, and when, it is necessary. The threat of recession normally evokes a response from the Fed. It appears that next week, most market participants expect the Fed to initiate yet another interest rate cut and possibly a new round of quantitative easing.
A slower economy and declining energy prices also pose some risks to the nation's corporations. Thanks to low interest rates that have been readily available for corporate borrowers over the last several years, a number of American companies may have borrowed a little too often. The results are that today there are some heavily leveraged companies out there that are up to their eyeballs in debt. If a recession were to begin, investors worry that not all of these companies will have the financial resources to weather a long downturn.
Likewise, lower oil prices pose a risk for many energy companies (and the banks that lend to them). There are about $100 billion in outstanding bank loans to energy producers through lines of credit, which are based on the value of a company's oil and gas reserves. These credit lines are evaluated twice a year.
The last time this was done oil was at $50 a barrel. If oil remains where it is (below $35 a barrel), a lot of oil production, especially among shale producers, won't be worth extracting, which means companies will no longer be able to borrow against production and must immediately repay their loans to the banks.
While we are in the early days, and the dollar and cents hit from the pandemic might not be as serious as many predict, the economic signs from China, indicate the opposite. The early data is breathtakingly bad, even though China, unlike, our own country, responded to the virus threat with quarantines and massive amounts of both economic and monetary stimulus.
Despite more than two months of evidence from countries such as China, Iran, Italy, South Korea and more, Donald Trump chose to downplay the response to this national threat. Only this week, when it is now too late to stem the tide of infection and the subsequent impact on our economy and financial markets, has Trump seemed to realize how badly he has miscalculated. In my opinion, that miscalculation has upped the probability of an imminent recession to an almost certain bet. It is simply a question of how deep and long the recession will be.
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