The CARES Act was passed to help average Americans through the Coronavirus crisis. It still takes good financial decision making to put this money in your pockets. Three common COVID money mistakes involve taking funds from retirement accounts. Avoiding these mistakes can help you save on taxes and keep your finances on track for the long run.
Don’t borrow from your retirement accounts.
The CARES act made it easier for participants in 401(k) plans to take loans from the plan. Taking a loan from a retirement account should be the last option you consider. The loan will need to be repaid with interest. Money you borrow from your retirement plan today won’t be working for you. Money that you withdraw or borrow today won’t be there when you need it in retirement.
Don’t take a hardship withdrawal from your 401(k) or IRA
Most withdrawals from retirement accounts before age 59 ½ are subject to a 10% tax penalty. The CARES act waives this penalty for certain withdrawals if you have suffered financial hardship because of the pandemic. Just because you can take an early withdrawal from your retirement plan does not mean it is a wise decision. Withdrawals are still subject to income taxes. You will also lose the benefit of long-term tax-deferred growth on the amount you withdraw. A retirement plan hardship withdrawal should be the last place you go for cash, and then only under dire circumstances.
Don’t take this year’s RMD unless you actually need the money.
The CARES act has a special perk for those who are already in retirement and are taking required minimum distributions. Retirees have the option to skip this year’s required minimum distribution. Skipping the required minimum distribution means you don’t have to pay taxes on that money until you withdraw it in the future. If you don’t need the cash today, allow it to continue to grow tax-deferred instead.
If you’ve already taken an RMD this year and want to undo it, there are ways to get the money back into your retirement plan and avoid taxes. Avoiding the tax may require some planning and will be easiest if done before July 15th. If you’ve already taken an RMD this year and want to reverse it, seek the advice of a CPA tax professional sooner rather than later.
Although the COVID-19 pandemic has created financial stress for many of us, long-term planning is still important. Before you tap into retirement funds, think about your financial plan. This means leaving retirement savings alone unless there is no other choice.
Matthew A Treskovich | CPA/PFS, CITP, CMA, CFP®, AEP®, MBA, CLU, ChFC, FLMI
Chief Investment Officer
The House and Senate recently passed new PPP legislation, The Payroll Protection Program Flexibility Act, signed into law by President Trump on June 5, 2020.
The Senate unanimously passed the legislation last Wednesday night (June 3rd) in a rush knowing that businesses still had until June 30th to apply for funds through the program. Below are some of the highlights for businesses to be aware of in regards to the PPP loan:
Payroll Expenditure Calculation
The requirement of using 75% of your PPP loan towards payroll and related expenses has been dropped to 60% with a cliff. If 60% of your loan is not used towards payroll, none of the loan will be forgiven. Remember that the other 40% must still be used towards the qualified expenses originally listed such as mortgage interest, rent or utilities.
Loan Period Extended
Formerly, the loan period to use these funds was 8 weeks from date of receipt or from the next available payroll. This period has now been extended to 24 weeks or until December 31, 2020; whichever comes first. This extension of time allows borrowers to adjust their employee workforce to pre-pandemic levels.
Also, business owners realize that some employees were making more in unemployment than when hired previously. If employees turned down good faith offers or if employers could not find enough qualified employees, the new legislation allows the borrow to adjust and exclude that information from the final calculation.
Payment Period Extension
Previously, PPP legislation was allowing a 2-year loan period at 1% interest. This period of payback has also been extended to five years. Existing PPP loans can also be extended if both parties agree on the new terms. Meet with your lender to find out.
Legislation can change very quickly, as we have absolutely seen during this economic crisis. It’s a great value to lean on your trusted advisor to stay on top of these changes to ensure you’re making the best choices for your business.
Derek M Oxford | CFP®, AEP®
The application to apply for loan forgiveness has been issued, and to further assist our clients and community members, we have compiled a list of common questions we have been receiving regarding the PPP loan. Please note, additional guidance is needed on several issues and the following information is not intended to be relied upon for official guidance. If you have specific questions regarding the PPP loan, or another financial related question, we invite you to contact our team at CPS Investment Advisors at: info@CPSInvest.com
- Question: Can the PPP funds be used to pay bonuses or increase salaries?
Answer: Perhaps yes, but further guidance is needed.
Covered payroll cost are currently listed as salary, wages, commissions, or tips (Capped at $100,000 on an annualized basis for each employee) Current guidance does not restrict an increase in salaries or bonuses, but keep in mind that each employee is still restricted to the $100,000 analyzation cap. (Capped at $15,384 per individual)
- Question: When does the 8-week (56 day) covered period start?
Answer: The date the lender makes the first disbursement of the PPP loan to the borrower.
The SBA answered this question in Question #20 of the PPP FAQ’s.
IMPORTANT: See question #9 (What is the “Alternative Payroll Covered Period”?) for an election to possibly adjust the start date.
- Question: Are the expenses used for forgiveness cash or accrual?
Answer: It’s a bit of a hybrid.
The loan forgiveness application specifies the following:
Eligible Payroll Cost: “Payroll costs incurred but not paid during the Borrower’s last pay period of the Covered Period (or Alternative Payroll Covered Period) are eligible for forgiveness if paid on or before the next regular payroll date.”
Eligible nonpayroll cost: “An eligible nonpayroll cost must be paid during the Covered Period or incurred during the Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered Period.”
- Question: If my rent increase, or if I’m renewing my lease agreement soon, will the new lease payment count toward loan forgiveness?
Answer: Not under current guidance. A leasing agreement must be in force before February 15, 2020.
CARES ACT SEC. 1106 (4) states,” the term ‘‘covered rent obligation’’ means rent obligated under a leasing agreement in force before February 15, 2020”
- Question: Can I contribute to my profit sharing plan (PSP) with PPP funds?
Answer: Further guidance is needed.
Currently, employer contributions to defined-benefit or defined-contribution plans are considered covered payroll cost. However, because PSP contributions are more discretionary, we caution the use of the funds into this type of plan until more guidance is provided.
- Question: What utilities can I use the PPP funds for?
Answer: Electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020. See the CARES ACT SEC. 1106 (5).
- Question: Will I get a tax deduction for the expenses paid with the PPP loan?
Answer: Not if the amounts used are forgiven.
The IRS provides more guidance in IRS Notice 2020-32 stating, “Specifically, this notice clarifies that no deduction is allowed under the Internal Revenue Code (Code) for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act)”
- Question: I have the PPP loan & EIDL loan. Can I keep and use them both?
Answer: In general yes, but the funds cannot be use for the same purpose.
Each loan has different restrictions regarding the use of the funds. Make sure you are using the funds in accordance with approved qualifying/covered cost.
- Question: What is the “Alternative Payroll Covered Period”?
Answer: You can elect to start the “8-week” covered period beginning the first pay period following their PPP Loan disbarment date.
The following is from the Loan Forgiveness Application:
“For administrative convenience, Borrowers with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the eight-week (56-day) period that begins on the first day of their first pay period following their PPP Loan Disbursement Date (the “Alternative Payroll Covered Period”).”
- Question: A safe harbor exists for loans less than 2-million dollars. Am I still subject to review?
Answer: Yes, you are subject to review regarding loan forgiveness.
The $2 million safe harbor regards the “good faith” certification made by a borrower when they initially applied for the PPP loan.
The SBA addressed this on Question #46 of the FAQ’s on the SBA’s website:.
- Bonus Question: How long should I retain my records for loan forgiveness?
Answer: Six years after the loan is forgiven.
The following is from the Loan Forgiveness Application:
“The Borrower must retain all such documentation in its files for six years after the date the loan is forgiven or repaid in full, and permit authorized representatives of SBA, including representatives of its Office of the Inspector General, to access such files upon request.
If you have any additional questions, please contact our team. 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: info@CPSInvest.com
Sterling J Searcy Jr | CPA
Senior Tax Advisor
The ongoing COVID-19 crisis has created hardships for many individuals and businesses. With many businesses and government offices closed, simple tasks like renewing a driver’s license have become much more complicated. The Federal and State governments, along with many local governments, have taken steps to make things easier by extending deadlines for several kinds of taxes and document filings.
Federal and State Taxes
The due date for filing 2019 federal income tax returns and making tax payments has been extended to July 15, 2020. There will be no additional interest or penalties assesses due to taking advantage of this 90-day relief provision, and no paperwork needs to be filed to qualify. The extension also applies to estimated tax payments for tax year 2020, which are normally due on April 15, 2020.
Although Florida does not levy state income tax on individuals, businesses are subject to income/franchise tax (CIT). In response to the crisis, the Florida Department of Revenue issued an emergency order that extends deadlines for certain CIT returns and payments, but the extension varies depending upon the business’s fiscal year. Some filing deadlines have also been extended for Sales and Use Tax for February and March reporting periods.
The REAL ID Act, passed by Congress in 2005, mandates minimum security requirements for state-issued driver’s licenses and identification cards. REAL ID-compliant identification, signified by a star in the upper right-hand corner, will be required in order to access federal facilities and board commercial aircraft. The deadline for the REAL ID act was originally set for October 1, 2020. Due to the COVID-19 crisis, the deadline has been extended to October 1, 2021.
Florida Driver’s License
The Florida Department of Highway Safety and Motor Vehicles has granted a 60-day extension for Florida driver’s licenses and State issued ID cards expiring March 16, 2020, through April 15, 2020, and a 30-day extension for those expiring April 16, 2020, through May 31, 2020. Additionally, the order extends through June 30, 2020, the effective period of commercial driver licenses with expiration dates on or after March 16, 2020.
Local Governments and Utilities
The Polk County Tax Collector has extended the deadline to pay 2019 delinquent real estate property taxes to 5:00 PM, June 12, 2020. Also, the City of Lakeland has extended deadlines for paying delinquent utility bills, and the City of Winter Haven has temporarily suspended service disconnects for non-payment. TECO has also temporarily suspended service disconnections for overdue bills as well as implementing a 20% rate decrease during the summer months for residential customers.
Rick Bernard | MBA
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: firstname.lastname@example.org
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: email@example.com
Don’t go at this alone. We’re all in this together.
Michael Scott | MBA, CFA
Senior Portfolio Analyst