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New Changes to PPP and EIDL Loan Programs

Presented by Matthew Lang, Lang Investment Services, 719-481-0887

The Paycheck Protection Program (PPP) was created to provide loans to support small businesses and save jobs during the COVID-19 pandemic. New legislation seeks to offer opportunities for qualifying businesses to receive a first or second forgivable PPP loan.

On December 27, 2020, the Consolidated Appropriations Act, 2021, was signed into law. It offers qualified business owners an opportunity to apply for a new PPP loan through March 15, 2021. This includes business who participated in the prior program and had a loan forgiven. It is anticipated the Treasury will issue further guidance on this new program in the future.

Key Provisions of the New PPP Bill

General

  • Qualified business expenses covered by PPP loans are tax deductible.
  • The PPP loan amount forgiven does not constitute business income.
  • The covered period for prior loans is extended to March 31, 2021, retroactive to the effective date of the CARES Act.
  • Borrowers may now choose the end of their forgiveness covered period between 8 and 24 weeks after loan origination.

Eligibility

  • Eligible businesses include for-profit businesses, certain nonprofit organizations (as defined in the provisions), and Schedule F Farmers.
  • Among other exclusions, these loans are not available for publicly traded companies.
  • The business must have been in operation by February 15, 2020.
  • Eligible employers include those with not more than 300 employees.
  • The business must have sustained a 25 percent reduction in revenue in any quarter in 2020, when measured against the same quarter in 2019.

Loan and Forgiveness Guidelines

  • The maximum loan amount under the new PPP program is $2 million.
  • Prior recipients of PPP loans are eligible for a new loan if they meet program qualifications, but the prior PPP funds must have been expended.
  • The maximum loan amount for second PPP borrowers is equal to 2.5 times their average monthly payroll, based on the 2019 calendar year or a one-year lookback period.
  • Prior recipients of a PPP loan who received less than $150,000 can submit a one-page forgiveness application to the bank (appropriate documentation and records retention is still critical for the borrower).
  • The PPP loan is forgivable, but 60 percent of it must be spent on payroll costs.

PPP Loan Forgiveness Changes

One key provision of the legislation affects previous PPP loan recipients. Under the prior rules, the Economic Injury Disaster Loans (EIDL) advance received by the PPP recipient was netted from the forgivable portion of the loan. The new legislation repeals that required reduction. The Small Business Administration (SBA) will issue rules on how this will be handled for prior borrowers who received loan forgiveness with this reduction.

PPP Borrowers Necessity Test

Just like its predecessor, this new PPP loan requires the borrower to attest to the business necessity of the loan, which is referred to as the “necessity test” requirement. General guidelines provide the loan should be necessary for the ongoing operation of the business. Although still not clearly defined, many experts caution applicants to carefully consider this “necessity test” requirement and consult with their CPA and legal counsel.

PPP Qualified Expenses

The new legislation expanded the qualified expense list to include:

  • Covered Operations Expenditure: Payment for software and cloud services necessary for HR payroll and expenses, facilitating business operations, accounting for expenses, and product or service delivery
  • Covered Supplier Cost: Supply expenses required to fulfill a contract made prior to the covered loan period
  • Covered Worker Protection Costs: Operating or capital expenditures required to comply with guidelines from the Department of Health and Human Services, the Centers for Disease Control and Prevention, the Occupational Safety and Health Administration, or state or local government beginning March 1, 2020, and ending when the national emergency is declared over by the president
  • Covered Property Damage Expense: Out-of-pocket expenses to cover property damage not covered by insurance when due to public disturbances
  • Payroll Costs: Employer payments for group life, disability, vision, and dental insurance payments

Previous guidelines also include the following qualified expenses:

  • Payroll costs, such as salary, wages, commissions, or tips
  • Payments for vacation, parental, family, medical, or sick leave
  • Payments for group health care benefits, including insurance premiums
  • Payments for retirement benefits
  • Employee state or local payroll taxes
  • Mortgage loan interest (excluding prepayment)
  • Utilities
  • Rent, including some equipment rental costs

EIDL Targeted Loan Program

The legislation directs that future EIDL processing prioritize businesses that:

  1. Are located in lower income communities
  2. Employ no more than 300 employees
  3. Suffered a greater than 30 percent economic loss

Borrowers under the EIDL program are required to provide documentation to the SBA of how the funds were expended 90 days after the loan is repaid. This program is also subject to release of borrower information under the Freedom of Information Act.

 What Expenses Can an EIDL Cover?

Loan proceeds can be used to pay for the following eligible costs (this list is not all inclusive):

  • Payroll costs, including paid sick leave for employees unable to work due to COVID-19
  • Principal and interest on mortgage payments
  • Rent
  • Increased materials costs due to supply chain disruption

Please note: You may not use an EIDL to pay the same expenses previously paid by a PPP loan. Many experts suggest that small businesses meeting the requirements should apply for PPP loans to cover payroll costs (due to the availability of loan forgiveness) and use EIDL proceeds for other needs. EIDL proceeds may not be used to refinance existing indebtedness.

Is There a Loan Forgiveness Provision?

Unlike the PPP, there is no loan forgiveness provision for EIDLs. Please contact the SBA for the latest program borrowing limits and loan terms.

EIDL Advance

Businesses suffering a substantial economic loss may apply for an EIDL advance that does not need to be repaid. The advance amount and availability may be up to $1,000 per employee, subject to a maximum advance limit of $10,000.

What Are the General Application Requirements for These Programs?

You apply for a PPP loan directly with your bank or other authorized lenders. The institution should provide specific guidance on its process for this new PPP lending program. You can apply for an EIDL directly on the SBA’s website.

Additional Information

Additional information on PPP loans and EIDLs can be obtained from the SBA’s website. You may also be able to receive guidance through SCORE or other professional business associations.

Further guidance is expected from the Treasury, IRS, and SBA in the coming weeks.

 This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

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Matthew Lang is a financial advisor located at 236 N Washington St, Monument, CO 80132. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 719-481-0887 or at matt@langinvestmentservices.com.

© 2020 Commonwealth Financial Network®

 

Embracing America’s Colorful Future

By: Anuradha Gaggar, CFA, FRM

The COVID-19 pandemic has exacerbated many issues that have been plaguing the social fiber of our nation for many years, including racial discrimination and economic and gender inequalities. Communities, governing organizations, and companies have responded by enacting regulations, guidelines, and programs that address these issues while also emphasizing the changing preferences of consumers. Below, I’ll unpack the business and investing case for addressing our nation’s evolving demographics. We should do so not because it’s “the right thing to do,” but because understanding this topic is necessary for resonance with consumers and investors now and in the future.

America’s Changing Façade

The year 2020 is expected to be a pivotal year for U.S. demographics. According to the U.S. Census Bureau projections, just under one half of children under the age of 18—49.8 percent to be exact—living in the U.S. in 2020 will be determined to be non-Hispanic whites. This number should decline even further over the coming decades. As demonstrated in the following chart, two out of every three children are expected to be a race other than non-Hispanic white by 2060.

While the aggregate U.S. population still looks like a white majority, whites should become a minority by 2043, dropping below 50 percent of our population. Additionally, working-age Americans (those between the ages of 18 and 64) should become a “majority-minority” by the year 2039. Given the pervasive impact of race on nearly every aspect of American society, these demographic shifts will have major implications for the future of the country. Our policies, economy, businesses, and even our investments will change. With these tectonic demographic shifts on the horizon, it’s unsurprising that social justice issues have dominated news headlines of late.

Spending Habits by Race

When assessing consumer spending by race, it’s also unsurprising that Americans in different income brackets tend to spend their money differently. Yet the differences in spending habits extend far beyond the dollars earned by families. For example, families who are within the same socioeconomic bracket but who are not the same race tend to spend money differently. The table below illustrates the average annual expenditure of consumers in the U.S. by race. In 2019, Asian Americans, on average, spent the most dollars on housing, transportation, food, personal insurance and pensions, and education. Black Americans spent the most on apparel and services. Whites and all other races spent the most on health and personal care, entertainment, alcohol, and tobacco. The evidence clearly supports the notion that consumer spending habits vary by race—a fundamental element for businesses to consider in positioning their products and services.

As the second-largest—and second-fastest-growing—demographic in the U.S., Hispanic Americans should account for a third of the American population by 2060 and will likely outspend whites in comparable economic brackets over their lifetimes. Only a few decades ago, Hispanic Americans were an emerging niche, primarily made up of migrant farm and factory workers and lower-income service workers. In 2020, however, according to the latest Hispanic American Market Report by Claritas, Hispanic households spent 17 percent more than other U.S. households on soaps, detergents, and other laundry and cleaning products. Accordingly, consumer-packaged goods companies might consider Hispanic households an attractive target market. In addition, Hispanic Americans tend to embrace the DIY (do-it-yourself) model, particularly when it comes to automobiles. This characteristic should make Hispanic Americans an excellent target group for automotive aftermarket retailers, as well as manufacturers of vehicle parts and fluids.

Nearly 50 million strong, Black Americans are the second-largest minority group in the U.S. after Hispanic Americans. The spending power of Black Americans has been well documented, especially compared with that of other races. Spending more than a trillion dollars a year, Black Americans have a buying power that’s greater than the GDP of many countries. In 2019, Nielsen, a renowned market research company, released a report on trends in Black buying power, highlighting the influence of advertising on Black consumers’ spending habits. Interestingly, the report found that Black Americans are 42 percent more likely than other Americans to respond to mobile ads. They also shell out 19 percent more on beauty and grooming products than any other U.S. demographic. Contrary to the shoppers powering the recent boom in e-commerce, Black Americans prefer in-store shopping experiences, typically at high-end department stores. This demographic also tends to emphasize giving, donating a larger share of their income to charities than any other group in the nation.

Although the smallest demographic cohort in the U.S., the Asian-American population is the fastest growing. When assessing consumer spending and engagement, the most compelling factor to highlight is the sheer buying power of the Asian-American demographic. The current average household income is 36 percent greater than overall household income and 22 percent greater than the average household income for whites. In its latest Asian American Market Report, Claritas found, on average, today’s Asian household members will spend $1.2 million more than members of non-Hispanic white households over the remainder of their lifetimes. Additionally, Asian-American households spend 21 percent more annually on consumer goods and services than the average U.S. household. That means Asian-American households rank first among all cultural groups, including non-Hispanic white households, for total consumer expenditures. It’s also worth noting that Asian Americans access social media on smartphones 23 percent more than other Americans and are twice as likely to use LinkedIn.

Investing in Demographic Trends

As with other economic trends, demographic trends create both risks and opportunities for businesses, economies, and society as a whole. A demographic turning point such as the one we’re currently experiencing will have a long-term impact on capital markets. For investors, it’s essential to monitor evolving trends, such as consumer spending habits, when identifying investment opportunities and planning strategies to mitigate risks. Furthermore, as the data presented here projects, minorities will soon emerge as the leading component of our nation’s youth and working population—and will also constitute a majority of the voting population. As a consequence, investors should pay attention to and prepare for the disruptive demographic shifts on the horizon. The pace of minority growth in America, coupled with the significant lifetime purchasing power of groups currently in the minority, is worth acknowledging (and embracing!). Therefore, the investment insight we should derive from the coming demographic megatrend is this: Invest in companies with the strategic foresight to pivot their businesses based on the demands of changing demographics

Matthew Lang is a financial advisor located at 236 N Washington St, Monument, CO 80132. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 719-481-0887 or at matt@langinvestmentservices.com.

© 2020 Commonwealth Financial Network®

Lower for longer interest rates

Another Look at the Dollar: The Fed and Interest Rates

Re-posted by Matthew Lang, Lang Investment Services

July 30, 2020

One of the reasons behind the recent decline of the dollar is reportedly the fact that the Fed has largely committed to keeping rates low—the market believes—forever. Looking at the yield curve, the 30-year Treasury rates are at 1.22 percent as I write this. With rates that low, the value of the dollar would certainly take a hit if other central banks raised rates.

Another way of looking at the dollar, then, is to determine whether the Fed is likely to raise rates. We can’t look at this possibility in isolation, of course. We have to evaluate what other central banks are likely to do as well. If everyone keeps rates low, then no problem. If everyone else raises rates and the Fed doesn’t, then the dollar would face headwinds. And, of course, if the reverse is true, then the dollar would have the wind behind it.

Every central bank, including the Fed, will make its own decisions, but they all have similar constraints. If we look at those constraints, we can get a pretty good idea of which banks will be raising rates (if any) and when.

Inflation

The first constraint, and the one that makes most of the headlines, is inflation. Right now, the fear is that the governmental stimulus measures, here and abroad, will drive inflation meaningfully higher and that central banks will be forced to raise rates. In that context, even if the Fed remains committed to lower rates, then other central banks will be forced to raise theirs, bringing us back to the first sentence of this post.

The problem with this argument is that we have heard it before, multiple times, and it has always proven false. Inflation depends on an increase in demand, which we simply do not see in times of crisis. The U.S., until at least the time the COVID pandemic is resolved, will not see meaningful inflation. Other countries, while less affected by COVID, have their own problems, and inflation is not likely to be a problem there either. Neither the Fed nor other central banks will be raising rates in any meaningful way. The argument fails. No problem.

The employment mandate

The second constraint, and one that is underappreciated, is that central banks have a responsibility to keep the economy going. Here in the U.S., that responsibility is expressed as the employment mandate. The Fed is explicitly tasked with keeping employment as high as possible without generating inflation. Raising rates will act as a headwind on employment. So, in the absence of inflation, the Fed has no need to raise rates. With employment not expected to recover for the next couple of years, again no problem with lower rates.

Other countries have the same issues, with the same results. Inflation is low and steady in all major economies, and unemployment is high in the aftermath of the global pandemic. For at least the next year and more, none of the central banks will face any pressure to raise rates—in fact, quite the reverse.

Lower for longer

The Fed will not be the only one holding rates low. The Fed has a press conference this afternoon where it is expected to repeat the “lower for longer” mantra. Other central banks are doing the same thing. Right now, the economy needs the support, and inflation is not a problem.

One question I have gotten is whether the Fed will implement some form of yield curve control and what that will mean for investors. Whether the Fed makes it explicit or not, I would argue that control is what we already have, and we have seen most of the effects already. Lower for longer has supported financial markets, and it will likely keep doing so. The Fed does not need to make it explicit, since it is doing so already.

Governmental finances

Looking beyond monetary policy and macroeconomics, there is another reason rates will likely remain low, which is that governmental finances will blow up if rates rise. At meaningfully higher rates, governments will simply not be able to pay their accumulated debt. All central banks are aware of this outcome, even if they do not talk about it. As far as the Fed is concerned, I suspect that not blowing up the government’s finances comes under the heading of maintaining maximum employment. It’s not an explicit objective, but it is a necessary one.

The wait for growth to return

Until we get growth, we will not get inflation. Without inflation, we will not get higher rates. With the U.S. likely to be ahead of the growth curve, as it has always been, the Fed will likely be the first to raise rates, not the last, with a consequent tailwind to the dollar’s value. Wait for growth to return, and we can have this discussion then.

That will not be soon though.

Matthew Lang is a financial advisor located at 236 N Washington St, Monument, CO 80132. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 719-481-0887 or at matt@langinvestmentservices.com.

© 2020 Commonwealth Financial Network®

Virus Hysteria

Virus hysteria

Dear Clients and Friends,

As we are all aware this last 3 weeks has been bad for the stock market. The market has dropped just under 20% from the peak as of yesterday’s close. Many of you are nervous and that is understandable. Over the last few weeks, a virus scare has become a hysteria. In my 22 years as a financial advisor I have never seen a hysteria quite like this one. In a small way it reminds me of a more extreme version of Y2K scare … stockpiling dry goods, worry about the unknown, and massive media hype playing into the worst parts of our fears. One thing I have learned through experience is every market drop is different … yet every market drop is the same. We now look at Y2K with a historical view, but the panic people felt at the time was real. My office is here to talk to you if you have concerns, questions or just want to status reports. Please don’t hesitate to call.

As part of my due diligence process, I find the smartest, best people and listen to what they have to say. Let me share an analysis from one of them.

Stephen Auth, Chief Investment Officer of Federated Investors wrote:

Given the novelty of this virus, we have no perfect template to answer some very key questions that ultimately will affect the outlook for the global economy and financial markets. How far will the virus spread? How long will it last? How many people in each country will be infected and worse, die, as it progresses country by country? No one knows, and most scientists, lacking the data, are unwilling to project potential outcomes. So we need a framework for understanding the data as it comes in and for projecting the trend and, importantly, the change in the trend. Here are the key stats we are following:

Virus progression in China: Slowing. China arguably is the key country to watch since the virus started there. Importantly, it is a “worst-case scenario” for how the epidemic will unfold because the flu got a more-than-usual head start in establishing itself, in part because the government blacked out news flow about it for weeks and because China’s health-care system is less advanced than in the developed world. So it’s good news infection rates in China already have begun to slow to just 3% per week, far below the explosive growth witnessed early on and is now occurring (off very low initial numbers) in the U.S. and Europe. If the weekly new infection rates in China continue to decline, that would portend positively for the path of the virus in the developed world. But if it reaccelerates, that would imply the virus is likely to enter a dangerous second growth phase even after the first phase fades. We’ll see.

Virus progression in Korea, Japan, and Italy: Still expanding. These are the next countries to watch. The virus landed there sooner than the U.S. and should peak sooner as well. If that occurs in these three countries within the next two to three weeks, consistent with what we’ve seen in China, markets will breathe a sigh of relief even if the expansion in the U.S. and Europe continues. But if the virus continues to expand in these early-stage countries, markets will begin to discount the possibility of a longer-term disruption in commerce and ultimately earnings.

Virus progression in the U.S.: Still expanding in the very early phase. For the next two to three weeks, we expect a daily drumbeat of new and ever-growing numbers of cases and cities with infections. Like China, once better and more available testing kits/protocols are deployed in the field, an alarming “sudden” jump in detectable cases is probably on the horizon. Ultimately, we doubt the U.S. markets will fully stabilize until U.S. infection rates begin to decline.

Virus progression in the presently hot, humid climates of the Southern Hemisphere: Low. We view the progress of the virus in hotter countries where it already has been introduced as accidental experiments that will help the markets answer a central question: like most others before it, will this flu epidemic be bailed out by the warmer weather only a few weeks away in developed Northern Hemisphere countries? Or is this new Covid-19 virus a monster than can better survive warm weather? With only 83 of a total of 97,886 worldwide cases of the virus reported occurring through yesterday in Southern Hemisphere countries, our base case is the former but we acknowledge the risk of the latter. If infection rates in the warmer countries above remain low, markets will take this as good news.

He went further to write:

Our view is the underlying health risks are potentially serious but likely overstated. Nonetheless, there remains a risk the economic impact is exaggerated by the individual reaction of the millions of market-economy participants operating within a collective, fear-driven crowd psychology (see insert at bottom). We are more worried about demand destruction than supply-side disruption, but are watching both.

Supply-side disruption measures: Limited so far. Supply disruptions can be dangerous because as shortages of key products and services needed for the global economy to operate smoothly develop, the overall economy can start to sputter and eventually stall. If iPhone components become unavailable, iPhone production inevitably will slow. With less iPhones in retail stores, iPhone sales inevitably will slow as well. Etc., etc., etc. China is the epicenter of this argument, largely because it is a crucial global supply chain source and because in its attempt to arrest the spread of Covid-19, it literally ordered key production centers to shut down temporarily. The good news is factories there are starting to come back on line, and so far, few other production centers have shut down. This makes sense. Most modern factories are highly automated, and if necessary, could be operated by workers in protective gear if there was a buck to be made. We are watching for both anecdotal reports of further supply disruptions, along with published weekly economic series such as rail and truck volumes. So far we classify this risk as “limited.”

Demand-side disruption: Limited but growing Demand disruption is the key risk ahead. As the public panics over the flu, and/or governments and corporations take preventive measures, we likely will experience additional demand disruption already hitting airlines, cruise ships, casinos, hotels and other components of the travel and leisure industries. Key potential weak spots include restaurant traffic in large cities, mass transit ridership and mall traffic. At the moment, most of these indicators are holding up, but we expect them to begin worsening in coming days. How long this will last will depend a little on the public’s perception of the risks of being out and about, even if everyone is taking normal precautions to limit the virus spread. Our view is that within a few weeks, the public in general will begin to assess the risk of the virus spreading more realistically, and with it, commerce in the retail side of the economy will begin to stabilize and even re-accelerate. Key indicators we are following include weekly series such as hotel occupancy and movie ticket sales.

Liquidity events: None so far. A third area we are monitoring closely are liquidity events that grow out of either supply or demand disruption. In 2008-09, this actually was the core of the crisis, as the temporary downturn in real estate markets, of which the banking system held levered positions, produced a temporary impairment of bank capital ratios. Because banks largely are funded overnight through demand deposits and/or the commercial paper market, this exposed them to a systematic withdrawal of cash at the same time, spawning a massive chain reaction of called loans and defaults that shut down borrowers, cut off credit and tanked the economy. This time around, the banking system is healthy. But in some ways, we do have a temporary systematic force at work: the potential for retail businesses suffering from a sudden drop in sales and cash flows. Another weak spot could be oil producers suffering from temporarily depressed spot prices and volumes. Many of the former are small businesses that both power the economy and, along with some of the latter, are highly levered. So we are watching for signs of stress that could suggest they are in danger of going under through, again, anecdotal bottom-up evidence from our stock and high-yield teams, along with such indicators as the National Federation of Independent Business small business confidence index and Challenger Gray’s measure of layoffs due to bankruptcies. Our base case is that given the systemic nature of the problem, corporate landlords and bank lenders are likely to extend terms until the storm passes rather than throw all their loan and rental customers under the bus at the same time. We’ll see. If bankruptcies begin to rise, it would be a sign that a liquidity crisis is emerging. And that in turn could lead to the next area we are watching.

Negative feedback loops: None so far Given the size of the publicly traded corporate credit markets and their increased importance in funding companies around the world, a freeze-up here could create a liquidity crisis that leads eventually to bankruptcies, rising unemployment, lower demand, lower earnings and still higher credit spreads, creating a reflexive feedback loop in the capital markets that takes on a life of its own. This is why we expect the Fed to remain focused on liquidity infusions (more below). In a related vein, we are watching the stock market itself, both for signs of compelling valuation and for potential negative wealth effects if the decline becomes long lived. And we are watching the potential for political feedback loops. That is, if the virus is quickly contained and the economy resumes its upswing, President Trump’s approval ratings should rise and the prospect of four more years of his pro-growth policies likely would buoy markets. On the other extreme, if things get so bad that voters become disillusioned with capitalism as an economic model, Bernie Sanders could rise in the polls and begin to take the delegate count lead again in the Democratic primaries. Joe Biden, now the Democratic front-runner, is probably viewed by the markets as market neutral.

Employment declines: Low so far. The fourth area we are watching is employment, the heartbeat of the economy. If businesses disrupted by the forces noted above begin to take more drastic countermeasures, such as laying off workers, our base case of a likely short economic disruption could extend to something worse, potentially a recession. The first sign of this happening will be employment. This will show up in key indicator series, especially weekly jobless claims data and, monthly, ADP’s tally of payroll growth among small companies (under 50 employees), the government’s count of non-farm jobs in the retail and leisure & hospitality industries, and Challenger Gray’s survey of layoff announcements. So far, so good.

The chess game of policy reaction

A third broad area of the present crisis is public policy reaction to mollify the impact of the pandemic on the global economy. Here, most of the talking heads have been, frankly, less than helpful. They conflate random various public policy tools, codifying them all as simply “stimulus measures.” Specifically, we are watching for following potentially helpful policy reactions:

Liquidity provision measures. Already underway, these key measures are vital. If we are right about the likely path here, the major near-term risk to the economy is that a short-term liquidity crisis, particularly among small businesses, morphs into store closures, bankruptcies and rising unemployment. So the monetary authorities in particular need to flood the system with liquidity to help these little businesses survive. This is why we liked the Fed’s sudden 50 basis-point cut, which some characterized as using its “stimulus bullets” too early. This cut should not be viewed as a stimulus bullet, but a liquidity bullet designed to avoid the need for a stimulus bullet. We think the Fed should further bolster liquidity through Quantitative Easing (QE) injections, in particular through direct purchases in the credit markets. This is where the real crunch seems to be occurring and could be the Achilles Heel in the capital markets. Other measures we are watching for include similar central bank action around the world (Hong Kong, Australia, Malaysia and the Fed so far this week), and regulatory relief by the appropriate overseers to encourage larger lenders and landlords to extend terms for borrowers being squeezed by the exogenous and systemic force of nature represented by the virus. (Very different from cutting off a sole borrower whose product/service is simply failing in an otherwise healthy economic environment.)

Short-term fiscal measures that can help with liquidity problems. On the fiscal side, governments have the ability to provide short-term cash to smaller businesses in the form of tax holidays, such as Social Security tax payments. We expect the Trump administration to utilize these in the weeks ahead and if we see them, we will mark this in the progress column.

Larger-scale fiscal measures to jump-start the economy if it heads into recession. Frankly, none are needed so far, as we are not in a recession. But should one come, the government certainly has the ability to legislate for large-scale tax or spending measures to spur the economy. We hope we don’t get to this stage but are comforted knowing that over the long term, such measures are available and likely would be employed.

Investment template: No time to panic

Against all this uncertainty, we are watching for opportunities under the assumption our base case (a short but sharp economic pullback followed by a dramatic back-half recovery) is correct. But we are pacing our investments to allow for a change in course should the areas we are monitoring turn more negative. We already have averaged in 2 points further to equities in our PRISM® stock-bond portfolio model on the first big downdrafts of last week (putting us at 70% of our maximum overweight in stocks), and have plans to add a third point if markets decline a full 20% from their highs. (In the past, 20% downdrafts have proven excellent long-term entry points—even during the 2008-09 crisis.)

At the portfolio level, we are similarly using big market down days to upgrade our portfolios, adding ever-higher quality long-term growth stories at significantly reduced prices. Again, we are advising moving deliberately and confidently into equity positions rather than trying to call a precise bottom amid the current volatility. We are entering the “Be Not Afraid” moment. Follow with us the progress of the crisis for sure, and adjust your strategy accordingly. But above all, remain confident and careful. This is no time for panic.

Everyone take care, please try not to worry. Also, don’t forget to buy 6 years’ worth of toilet paper just in case.

Regards,
Matt

_____________________________
Matthew R. Lang
Financial Advisor

236 North Washington
Monument, CO 80132
Phone: (719) 481-0887
matt@langinvestmentservices.com | www.langinvestmentservices.com

Independent Advice. Securities and advisory services offered through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser. Fixed insurance products and services are offered through CES Insurance Agency.

Lang Investment Services Life Insurance

Common Tax Traps Involving Life Insurance

Life insurance delivers cash to beneficiaries when it’s needed most. Plus, if the policy is properly structured, the beneficiaries receive the death proceeds income tax free. By understanding potential tax traps related to life insurance, you can avoid costly mistakes. A few of the most common pitfalls are outlined here.

Three people on a policy

If you gift property to another person, the transfer triggers gift taxes based on the taxable value of the gift. When you transfer ownership of an existing policy to someone other than your spouse, the gift is immediate and generally approximates the cash value. There is an important exception, however. When the owner, the insured, and the beneficiary are three different people, the gift occurs when the insured dies, and the death benefit is treated as a taxable gift from the policy owner to the beneficiary. Under what is known as the Goodman Rule, the gift is no longer based on the policy’s cash value but, rather, on its death benefit.

The solution is to eliminate one party. To avoid potential gift taxes, the owner and the beneficiary or the owner and the insured should be the same person. If the goal is to benefit a third party, an irrevocable life insurance trust should be the owner and beneficiary of the policy.

Three people on a policy in a business situation

This scenario is similar to the previous trap except that, rather than triggering gift taxes, the death benefit is treated as taxable compensation of the employee (or as a dividend of a shareholder). For corporate-owned policies with personal beneficiaries, the business is deemed to have received the death proceeds and then paid them to the employee or shareholder’s family. Thus, the beneficiary owes income taxes on the death benefit as a distribution from the business.

One possible solution is an endorsement split-dollar arrangement. With this kind of plan, the business owns the policy but allows the employee to name a personal beneficiary. While the employee is working, the employer is taxed on the policy’s “economic benefit.” If the policy is properly structured, the death proceeds should be income tax free. Keep in mind that a notice and consent requirement must be met before an employer-owned life insurance contract is issued.

Alternatively, an executive bonus plan can eliminate the tax-on-death problem. The business pays the premiums for a life insurance policy personally owned by the employee. While the employee is working, the payments are treated as additional taxable compensation.

Exchange of a policy encumbered with a loan

Under Section 1035 of the Internal Revenue Code, you can exchange one life insurance contract for another without triggering income taxes. But when an existing loan is extinguished in the exchange, it may cause unwanted tax consequences. Generally, if the loan will be cancelled (discharged) in the course of the exchange, then the amount of the loan is treated as ordinary income up to the amount of the policy’s gain. The first-in, first-out rule does not apply when a withdrawal is made from the cash value to pay off a loan during or shortly before a 1035 exchange transaction.

One solution is to arrange for the new life insurance policy to take over the existing loan. Because you’re in the same economic position before and after the exchange, no gain should result. But keep in mind that the loan may affect the new policy’s performance and possibly shorten or eliminate the guaranteed death benefit.

Alternatively, you may wish to pay off the loan with out-of-pocket dollars before the exchange. One word of caution: a normally tax-free withdrawal of basis to pay off the loan shortly before an exchange is treated by the IRS as a step transaction and can trigger taxes.

Gift of a policy encumbered with a loan

Typically, the gift of life insurance creates no income tax recognition for either the donor or the recipient, although gift taxes may be involved. When a policy is subject to a loan, however, the transfer of the policy relieves the original policy owner of the debt. Because the donor is deemed to have received an economic benefit from transferring the loan obligation to the new policy owner, the transfer is treated as if the policy were sold. If the loan exceeds the policy owner’s basis, the donor will recognize taxable income.

Lapsing a policy encumbered with a loan

One key benefit of permanent insurance is the right to take out a policy loan without having to qualify financially. An insurance company makes a policy loan from its general fund using the policy cash value as collateral. Repayment of the loan principal or the annual interest is optional, and unpaid interest is added to the loan principal. If the borrower fails to repay the loan before the death of the insured, the money is simply withdrawn from the insurance death benefit before it is distributed to the policy beneficiaries.

It’s important to note that life insurance contracts may have an automatic premium loan provision that authorizes the insurance company to lend money to pay the premiums if the policyowner fails to do so. Left unmonitored, an automatic loan provision can result in a lapse of the policy and unexpected taxes.

Taking a withdrawal in the first 15 policy years

Normally, a withdrawal from a policy’s cash value is treated as coming first from cost basis and subsequently from the contract’s gain, resulting in a one-to-one reduction of the death benefit. There is an important exception, however. A withdrawal from a universal life or variable universal life policy within the first 15 policy years will be treated as coming from gain first, if there is any.

To deal with this risk, some insurance companies allow for up to a 10-percent withdrawal with no reduction in the death benefit. If you wish to take more than 10 percent of the policy’s cash value, consider structuring the transaction as a loan. Be sure to weigh the long-term cost of the loan against the potential tax associated with a withdrawal.

Incorrectly structured cross-purchase policies

If it’s not properly structured, life insurance purchased to fund buy-sell plans may have unwanted tax consequences. In a cross-purchase buy-sell arrangement, each business partner owns a policy on the other partners. At the death of a partner, the survivors use the insurance proceeds to buy out the estate of the deceased. Thus, each business partner is both the owner and beneficiary of the policy he or she has taken out on the other. Any other arrangement can fall into the transfer-for-value trap.

If a policy is transferred for money or something of value, the death benefit is no longer fully income tax free. For example, the mutual obligation to purchase a co-owner’s business interest at his death would be considered something of value. The transfer-for-value rule also applies when one partner buys a personal policy on his or her own life and makes his or her partner the policy beneficiary.

Exceptions to the rule include:

  • A transfer of the policy to the insured
  • A transfer of the policy to a partner of the insured or to a member of a limited liability company taxed as a partnership
  • A transfer of the policy to a partnership in which the insured is a full partner
  • A transfer of the policy to a corporation in which the insured is a stockholder, an officer, or both
  • A bona fide gift, such as a transfer of the policy to a spouse or trust of the insured

The simplest solution is to purchase new policies to fund the buy-sell arrangement. If that’s not possible, the business owners should try to qualify under one of the exceptions above. If the business owners are not already partners in some business entity, they may consider creating or investing in a partnership.

Using life insurance instead of a trust
To avoid the cost and complexity of a trust, some parents elect to have their adult children jointly own their life insurance policies. In such cases, the parent’s payment of the premiums directly to the insurance company will not qualify for the annual gift tax exclusion. Although the parent is making an indirect gift to his or her children, the gift tax exclusion is only available if each policy owner has an unrestricted right to access the policy’s cash value. With joint ownership with right of survivorship, neither child can access the cash value without consent of the sibling.

Sometimes, a parent may transfer his or her life insurance policy to one child and ask that all siblings remain as beneficiaries, which is a classic example of the Goodman Rule. At the parent’s death, the child who owns the policy will be deemed to give the policy proceeds to his or her siblings, possibly incurring gift taxes.

If optimizing the annual gift tax exclusion is an important goal, consider a trust to hold the life insurance. Alternatively, you can explore ownership as joint tenants in common. With joint tenants in common registration, each owner has an undivided 50-percent interest in the policy’s cash value. Not all insurance companies offer this kind of registration, however.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

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Matthew Lang is a financial advisor located at 236 N Washington St, Monument, CO 80132. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 719-481-0887 or at matt@langinvestmentservices.com.

© 2019 Commonwealth Financial Network®

Death of a Spouse

Survivor’s Financial Reminders: Death of a Spouse

The death of a spouse or life partner is difficult enough without having to make decisions about a host of financial issues. To help minimize stress when this sad time arrives, the following list provides a framework for organizing your financial affairs and those of your partner.

Death certificates. To file for various benefits, you must provide a death certificate. Obtain at least 10 certified copies from the funeral director or from your state’s department of health or vital records. An excellent resource for finding the appropriate office in your state is the Where to Write for Vital Records page on the Centers for Disease Control and Prevention (CDC) website, www.cdc.gov/nchs/w2w.htm.

Insurance policies. Have on hand a list of insurance companies, policy numbers, and social security numbers. Although you don’t need to produce the original copy of the policy to file for a death claim, it will speed up the process.

 For coverage written in the past 15 years, you may be able to locate missing policies through MIB Solutions, Inc., a company that provides services to the insurance industry. You can access the company’s Policy Locator Service, for a $75 fee, at mib.com/lost_life_insurance.html.

  • Contact numbers for old policies may no longer be valid. Get in touch with your state’s department of insurance to obtain new telephone numbers for filing death claims with carriers that do business in your state.
  • Look through your (and your deceased partner’s) checkbook registers for records of insurance premium payments, and contact the carrier(s) to ask about possible benefits.
  • Contact your deceased partner’s most recent employer regarding group benefits.
  • Check with your credit card, bank, and loan companies regarding eligible death benefits.

Military discharge papers. You may be entitled to veteran benefits if your spouse served in the military. Obtain a copy of his or her military records through the Veterans’ Service Records page on the National Archives website at www.archives.gov/veterans/military-service-records.

Marriage certificate. You may need copies of your marriage certificate to apply for certain dependent benefits. Obtain copies through the county or town in which your marriage license was issued. You can also use the CDC’s Where to Write for Vital Records page, mentioned above, to obtain contact numbers for where to get this information in your state.

Children’s birth certificates. Your dependent children may be eligible for benefits. Refer to the CDC’s Where to Write for Vital Records page to obtain contact information for the state where the child was born.

Last will and testament. Most people keep their will in a safe deposit box, a safe, or an important document file drawer. If you cannot locate your partner’s will, you can most likely obtain one from your attorney. If no will was created or you cannot find one, contact your county’s probate department to determine whether your partner’s estate qualifies for a simplified probate procedure. If necessary, make a formal application to the court to be appointed personal representative of your partner’s estate. Please note: It is not recommended to store a will in a safe deposit box if it is to be sealed upon your death.

Bank and brokerage accounts. Jointly owned accounts are not tied up in the probate process. Contact your bank and broker to change the account to your name. Accounts owned individually by your spouse must be transferred to an estate account.

IRAs and employer retirement plans. It may be beneficial to roll over your spouse’s IRAs into your own IRA. If you are younger than 59½ and intend to use the IRA for living expenses, you may decide to move the account to an inherited IRA to avoid tax penalties for early withdrawal. In addition, your spouse’s plan may offer a survivor annuity or a lump-sum payout. To avoid unnecessary taxes, discuss the options with your financial advisor.

Contact the Social Security Administration (SSA). You and your dependent children may be eligible to receive a small social security death benefit and survivor income benefits. Contact your local social security office, or visit the Survivors Benefits section of the SSA website at www.ssa.gov/benefits/survivors.

Tax identification numbers (TINs). You, your spouse’s executor, or your spouse’s trustee will need to obtain TINs for the estate and for any formerly revocable trust. Give these numbers to your bank and brokerage firms.

Taxes. You may incur additional taxes at your spouse’s death. Before transferring accounts or distributing estate assets, talk with your attorney and accountant. You will also have to file a final income tax return for your spouse.

Health insurance. If your spouse had health insurance at work, you may qualify for COBRA benefits for up to 36 months. Although the premiums may increase, they are generally considerably less costly than private insurance. Contact your spouse’s employer for more information. Also contact your own employer to find out whether you are eligible for health insurance benefits following your change in status.

Credit cards. Notify your spouse’s credit card issuers to cancel the account. If it is a joint account, cancel it or list the account in your name only.

Your personal financial affairs. It is advisable to avoid major changes for at least six months after a partner’s death or until you feel that you can make sound financial decisions.

  • Take time to consider any proposals from family, friends, and your professional advisors.
  • Ask as many questions as necessary, and have a trusted advisor look over any financial decision you are considering during this stressful time.
  • Review the beneficiaries of your own insurance policies, IRAs, and other retirement accounts, and make appropriate changes.
  • Beneficiary designations can always be changed later—after you and your attorney have reviewed and updated your estate plan.

 This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

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 Matthew Lang is a financial advisor located at 236 N Washington St, Monument, CO 80132. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 719-481-0887 or at matt@langinvestmentservices.com.

© 2019 Commonwealth Financial Network®

Transfer on Death (TOD) Accounts

What You Need to Know About TOD Accounts

A relatively new option for clients, transfer on death (TOD) accounts offer a unique beneficiary feature. Unlike similar non-retirement accounts, TOD accounts allow investors’ assets to transfer directly to their designated beneficiaries when they pass away, circumventing the probate court process. The TOD registration, which is available for both individual and joint accounts, not only streamlines the account disbursement process, it also lets account holders rest assured that their beneficiaries will receive the intended amount of assets.

TOD features

Streamlined administration. With a traditional brokerage account, the owner’s assets go to the estate upon his or her death, and distribution is delayed until the probate process is completed. By contrast, funds held in TOD accounts are considered non-probate assets and pass straight to the designated beneficiaries. Once a TOD account has been established, neither a court appointment nor an account holder’s will can supersede the Supplemental Transfer on Death Registration and Beneficiary Designation Form, which designates the account’s beneficiaries. If necessary, powers of attorney may be added to TOD accounts, but they cannot establish the account or update the beneficiary designation.

TOD accounts have no contribution limits and can hold all types of positions. When the owner dies, all trading in the account must cease to prevent taxable events to the estate. The TOD account assets can, however, be transferred to the beneficiaries’ accounts, and the beneficiaries may then sell the positions, if desired. In order for a beneficiary to receive assets from a TOD account, he or she must have a brokerage account open at Commonwealth.

Tip: Before opening a TOD account, consider the location of your beneficiaries. For example, if a beneficiary lives out of the country, you will need to plan accordingly.

Unlimited number of beneficiaries. TOD account holders can designate an unlimited number of beneficiaries, each of whom will be considered a primary beneficiary. Contingent beneficiaries may be added as well. The TOD account owner can choose, among other entities, his or her estate, individuals (including minors), trusts, and churches, as beneficiaries.

You retain control. As the account owner, you continue to manage the account assets as you wish. Your beneficiaries have no rights to the account while you are living. If necessary, you can revise your beneficiary designations.

Keep in mind

TOD accounts are not for everyone. It’s important to consider how establishing this type of account will affect your overall estate plan and the provisions of your revocable trust or will.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

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 Matthew Lang is a financial advisor located at 236 N Washington St, Monument, CO 80132. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 719-481-0887 or at matt@langinvestmentservices.com.

© 2019 Commonwealth Financial Network®

Stock market ebb and flow

The worries on the market ebb and flow like the tides.

Last autumn, the worries were in full force: are we nearing a recession, is inflation coming, is this the big market correction, will the trade war escalate, will we have a lasting government shutdown, and many more.  Consequently, the market had a big drop in Q4 of last year, bottoming on Dec 24 with a drop of about 20% in 3 months.  Ouch.

Then something remarkable happened.  The worries all seemed to go away.  And just like that, the market has bounced back entirely and is right now butting up against the all-time high levels.

So what happened?  Nothing. The worries which existed in Q4 still exist.  In actuality these worries plus a myriad of other worries are always present.  The worries represent the balance of risk, which is essential in a functioning market.

I remember when I was a 25 year old advisor in 1999 at the peak of the tech bubble (we didn’t know it was a bubble then however) hardly anyone was worried, including myself.  “This is the new, connected world….a new economy,” was what everyone was saying.  And my least favorite expression of all, which I still hear on the financial news is, “we are in a goldilocks economy.”  I know what the talking heads are trying to say; the economy is neither too hot or too cold…just right; but personally I think they should find an example that doesn’t have bears in it.  More to my point, in 1999 the worries were gone, but the underlying risks were as high as ever.  The second chapter of the Goldilocks should have been published in 2000 with the bears chasing down a terrified Goldilocks and getting even.

The current worry list has some of the same entries as Q4 last year, minus a few that are resolved and plus a few new ones.  I’m happy the worries are there.  I’m happy the market risk is balanced.  I’ll be worried when everyone else is not.  I’m not worried about rain while its raining, I’m worried about rain while its sunny.

We’ve enjoyed a 2019 rally (bouncing off the 2018 swoon) and the market is probably due for a breather in the short term.  However, I think this will continue to be a good year in the market overall.  Instead of looking at the worries, I look at the reality.  We have a great economy, everyone who wants a job has one, low inflation, low interest rates, people are spending money, business is expanding, capital expenditures are up, and people are generally happy.

Spring is in the air.  In Colorado we are having our first 70 degree days this week.  Enjoy this time of year…..and leave the worrying about your money to me!

 

Matthew Lang is a financial advisor located at 236 N Washington St, Monument, CO 80132. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 719-481-0887 or at matt@langinvestmentservices.com.

Another one of those days

Its another one of those days. Everything sells down on the market and bad news seems everywhere. Today the sell off was a result of Apple lowering guidance. I guess for some odd reason the Chinese are buying fewer phones because they are pissed off at America about the tariff and trade issues.

The bigger questions about today’s sell off are still: is the economy really weakening? Is the trade war going to soften or resolve? Is the government shutdown going to end soon?

I think the answer to a softening economy question is that the economy is slowing, but we still added 100,000 new jobs over expectations on today’s report (good news which was ignored). And slowing doesn’t mean a recession, it means positive growth, but just a slower pace.

I also think the trade war finds common ground and softens sooner than later. It is in both the US and China’s best interest to find a solution and I think they will.

The government shutdown won’t go on much longer. Someone is going to give.

What happens when the worries go away? All we are left with is a growing economy, low inflation, everyone who wants a job has one, and the world isn’t all that bad….oh and the stock market is cheaper than it was. People say to buy low….right?

Stock Market Panic

Market Panic: December 2018 edition

December has been a bad month for the markets worldwide. This bull market we are in is being shaken and people are worried. I’ve had a few panic calls from clients, but even if you didn’t pick up the phone I can sense you are nervous.

Here are the facts:

  • We have low unemployment
  • We have low inflation
  • We have low interest rates
  • We have a growing economy.

Here are the worries:

  • Trade war with China
  • Looming recession
  • Rising interest rates
  • Government shutdown
  • Mueller Investigation
  • President Trump putting foot in his mouth
  • Border security
  • Terrorist attacks
  • and finally (for my vegetarian clients) … romaine lettuce contamination.

If you concentrate on the worries blasted all over the news, you might be a little freaked out.

But if you turned off the news, you’d realize:

  • You have a job
  • You probably earned more money this year
  • Your company is hiring
  • Your mortgage rate is low
  • Your home has appreciated in value
  • and you’re generally happy.

Why is everyone so worried? Why do people think a recession is looming? I don’t have that answer, but just because we haven’t a recession in ten years doesn’t make it any more likely.

It’s okay to feel nervous and its okay to ask your advisor what’s going on with your accounts, but making a change because of non-quantifiable worries vs. quantifiable facts is likely going to be a mistake.

I feel this market is massively oversold and is now trading at a lower valuation than its 65 year average. International and emerging markets are even more disproportionately undervalued in my opinion.

I have the only store in the world where when my inventory goes on sale no one wants to buy … everyone wants to wait for full price to come back!

Take care, have a great Christmas, turn off the news, enjoy your family.