Where Does This GameStop Story Go Next?

Last week we saw small investors flex their collective muscle, starting 2021 with its own set of unprecedented story lines. Last week’s moves in a select set of heavily shorted stocks caused a stir on Wall Street, got the attention of the Securities and Exchange Commission (SEC) and left investors asking some questions.

What Happened?

GameStop Corp., a brick-and-mortar retail store that specializes in video game sales, grabbed most of the media attention. Their share price surged 400% last week, bringing the stock’s year-to-date total return to 1,625%¹. Other examples of large upward price adjustments were in shares of AMC Entertainment and KOSS Corp. AMC’s stock gained 277% last week while Koss’s gain was 1,816%².

It is difficult to suggest that these sudden price moves were warranted with these stocks. Efficient Market Hypothesis (EMH) would assume that stocks always trade at their fair value. GameStop’s naming of Ryan Cohen to the board in early January and his expected impact to move the retailer online started what appears to be their process of moving toward true price discovery; however, subsequent events are what raised eyebrows.

GameStop Stock Growth 2021

How Did It Happen?

Social media and online chat groups empower people to connect quickly with others to mobilize action. Last week, users of the Reddit forum r/WallStreetBets attempted to beat hedge fund managers at their own game. GameStop is a stock that some hedge fund managers heavily betted upon losing value, known in the financial industry as “shorting a stock” – where hedge fund managers provide collateral to borrow shares of that stock, sell the borrowed shares for cash and wait for the price to fall so they can buy them back at a lower price. If a hedge fund manager’s borrowed shares increase in value instead of declining, they have to find more collateral to satisfy the lender. If they run out of collateral, or the lender runs out of patience, the fund must buy back those shares at the higher value and take a loss.

In this instance, the r/WallStreetBets-inspired buyers purchased GameStop stock en masse via the RobinHood investment app, hoping for one of two things to occur: either the actual fundamental value of these securities is realized to be at these new and higher levels, or the flow of demand from other new buyers behind them would continue to increase the stock’s value to their benefit.

This rise in GameStop’s value created a rush among hedge fund managers to buy back shares to limit their losses. Yet, this collective scramble to buy increased the upward pressure on the stock’s price – referred to as a “short squeeze.” Similar to turning up the flow of water through a garden hose and seeing the water shoot out further, the volume of buying in shorted stocks can overwhelm the diameter of the hose, shooting the water extremely high. This is what happened with GameStop, leading to collateral damage to Robinhood, which required a multi-billion dollar injection of cash, and direct damage to hedge funds caught on the wrong side of the short squeeze.

How Does It Impact Moneta Clients?

While not a major market driver, there could be side effects for the overall market in the short-term. Moneta Director of Investment Research, Luke Ferraro, CFA, said, “The forced buyers [the hedge funds] in these securities may need to raise cash elsewhere to fund their purchases. Some say this explains why the overall market traded lower last week. If leveraged buyers were forced to cover their bearish bets, they may have had to sell some of their more well-known stocks.”

Liquidity driven moves in the market could work in long-term investors’ favor. We witnessed last March how an overwhelming amount of sell orders can drive securities down in a short period of time. For an individual who is cash short and needs to transact in such a market, finding liquidity can be a struggle and costly as they are forced to sell at disadvantaged prices. One needs only to think about the individuals who are forced to buy GameStop at these levels. But for the long-term investor, who provides liquidity in the market, the dramatic moves in the market may present the opportunity to rebalance their portfolios at more advantageous prices.

Can it Happen Again?

Moneta Investment Consultant, Chris Kamykowski, CFA, said, “Short squeezes happen and will continue to, but I would not expect it to occur again in the same way. Ultimately, the market is largely efficient and will course correct.”

While we expect periods of elevated volatility such as this in 2021, we continue to have a positive outlook for the economy and believe our portfolios continue to be well-positioned to balance risk and return while navigating the continued economic recovery from the pandemic.

What’s Next?

The funny thing is that even as dramatically and rapidly as the stock and story took off, we are already seeing an unwinding as GameStop and other stocks caught in the recent upward vortex, now fall from their commanding heights from only a short few days ago.

What is certain to linger are many unanswered questions about who, what, why and how all this happened, which will certainly be around longer than the lifetime of this event (though the lingering effects of the event may be seen for quite some time).

It’s too soon to know the long-term impact for sure. There is a high probability that litigation will follow, demands for accountability and regulatory changes will arise, and a few investment firms may close shop.

Kamykowski said, “At the end of the day, fundamentals matter. While the market’s response to this event is evolving, the events have limited, if any, impact on the fundamental drivers of the economy. We still have more vaccines on the way; improving distribution and administering of said vaccines; a successful transfer of power complete; continued monetary policy support; and additional economic stimulus likely on the way.

We’re still moving along a solid trajectory and getting back to a new ‘normal.’ None of that has changed because of the drama seen over the last couple weeks between retail investors and professional investors. Remaining diversified in your investments, aligning your portfolio to your objectives, and focusing on the long-term still remain key considerations even as events like this catch the attention of markets.”

Your Moneta investment team will continue to closely monitor the events and their impact. Please speak with your Advisor about your specific portfolio.

[1] https://www.bloomberg.com/news/articles/2021-01-29/historic-week-for-gamestop-ends-with-400-rally-as-shorts-yield

[2] https://www.marketwatch.com/story/dow-futures-rise-250-points-as-the-stock-market-tries-to-shake-gamestop-angst-11612182450

©2021, Moneta Group Investment Advisors, LLC. These materials have been prepared for informational purposes only based on materials deemed reliable, but the accuracy of which has not been verified. Given the dynamic nature of the subject matter and the environment in which these materials were prepared, they are subject to change as additional information comes forth.  Past performance is not indicative of future returns. You cannot invest directly in an index. These materials do not constitute an offer or recommendation to buy or sell securities, and do not take into consideration your circumstances, financial or otherwise. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision.

The post Where Does This GameStop Story Go Next? first appeared on Moneta | Fee Only Financial Planning | Investment Advisors | Clients Nationwide.

source https://monetagroup.com/cwcj-where-does-this-gamestop-story-go-next-2/

Where Does This GameStop Story Go Next?

Last week we saw small investors flex their collective muscle, starting 2021 with its own set of unprecedented story lines. Last week’s moves in a select set of heavily shorted stocks caused a stir on Wall Street, got the attention of the Securities and Exchange Commission (SEC) and left investors asking some questions.

What Happened?

GameStop Corp., a brick-and-mortar retail store that specializes in video game sales, grabbed most of the media attention. Their share price surged 400% last week, bringing the stock’s year-to-date total return to 1,625%¹. Other examples of large upward price adjustments were in shares of AMC Entertainment and KOSS Corp. AMC’s stock gained 277% last week while Koss’s gain was 1,816%².

It is difficult to suggest that these sudden price moves were warranted with these stocks. Efficient Market Hypothesis (EMH) would assume that stocks always trade at their fair value. GameStop’s naming of Ryan Cohen to the board in early January and his expected impact to move the retailer online started what appears to be their process of moving toward true price discovery; however, subsequent events are what raised eyebrows.

GameStop Stock Growth 2021

How Did It Happen?

Social media and online chat groups empower people to connect quickly with others to mobilize action. Last week, users of the Reddit forum r/WallStreetBets attempted to beat hedge fund managers at their own game. GameStop is a stock that some hedge fund managers heavily betted upon losing value, known in the financial industry as “shorting a stock” – where hedge fund managers provide collateral to borrow shares of that stock, sell the borrowed shares for cash and wait for the price to fall so they can buy them back at a lower price. If a hedge fund manager’s borrowed shares increase in value instead of declining, they have to find more collateral to satisfy the lender. If they run out of collateral, or the lender runs out of patience, the fund must buy back those shares at the higher value and take a loss.

In this instance, the r/WallStreetBets-inspired buyers purchased GameStop stock en masse via the RobinHood investment app, hoping for one of two things to occur: either the actual fundamental value of these securities is realized to be at these new and higher levels, or the flow of demand from other new buyers behind them would continue to increase the stock’s value to their benefit.

This rise in GameStop’s value created a rush among hedge fund managers to buy back shares to limit their losses. Yet, this collective scramble to buy increased the upward pressure on the stock’s price – referred to as a “short squeeze.” Similar to turning up the flow of water through a garden hose and seeing the water shoot out further, the volume of buying in shorted stocks can overwhelm the diameter of the hose, shooting the water extremely high. This is what happened with GameStop, leading to collateral damage to Robinhood, which required a multi-billion dollar injection of cash, and direct damage to hedge funds caught on the wrong side of the short squeeze.

How Does It Impact Moneta Clients?

While not a major market driver, there could be side effects for the overall market in the short-term. Moneta Director of Investment Research, Luke Ferraro, CFA, said, “The forced buyers [the hedge funds] in these securities may need to raise cash elsewhere to fund their purchases. Some say this explains why the overall market traded lower last week. If leveraged buyers were forced to cover their bearish bets, they may have had to sell some of their more well-known stocks.”

Liquidity driven moves in the market could work in long-term investors’ favor. We witnessed last March how an overwhelming amount of sell orders can drive securities down in a short period of time. For an individual who is cash short and needs to transact in such a market, finding liquidity can be a struggle and costly as they are forced to sell at disadvantaged prices. One needs only to think about the individuals who are forced to buy GameStop at these levels. But for the long-term investor, who provides liquidity in the market, the dramatic moves in the market may present the opportunity to rebalance their portfolios at more advantageous prices.

Can it Happen Again?

Kamykowski said, “Short squeezes happen and will continue to, but I would not expect it to occur again in the same way. Ultimately, the market is largely efficient and will course correct.”

While we expect periods of elevated volatility such as this in 2021, we continue to have a positive outlook for the economy and believe our portfolios continue to be well-positioned to balance risk and return while navigating the continued economic recovery from the pandemic.

What’s Next?

The funny thing is that even as dramatically and rapidly as the stock and story took off, we are already seeing an unwinding as GameStop and other stocks caught in the recent upward vortex, now fall from their commanding heights from only a short few days ago.

What is certain to linger are many unanswered questions about who, what, why and how all this happened, which will certainly be around longer than the lifetime of this event (though the lingering effects of the event may be seen for quite some time).

It’s too soon to know the long-term impact for sure. There is a high probability that litigation will follow, demands for accountability and regulatory changes will arise, and a few investment firms may close shop.

Moneta Investment Consultant, Chris Kamykowski, CFA, said, “At the end of the day, fundamentals matter. While the market’s response to this event is evolving, the events have limited, if any, impact on the fundamental drivers of the economy. We still have more vaccines on the way; improving distribution and administering of said vaccines; a successful transfer of power complete; continued monetary policy support; and additional economic stimulus likely on the way. We’re still moving along a solid trajectory and getting back to a new ‘normal.’ None of that has changed because of the drama seen over the last couple weeks between retail investors and professional investors. Remaining diversified in your investments, aligning your portfolio to your objectives, and focusing on the long-term still remain key considerations even as events like this catch the attention of markets.”

Your Moneta investment team will continue to closely monitor the events and their impact. Please speak with your Advisor about your specific portfolio.

[1] https://www.bloomberg.com/news/articles/2021-01-29/historic-week-for-gamestop-ends-with-400-rally-as-shorts-yield

[2] https://www.marketwatch.com/story/dow-futures-rise-250-points-as-the-stock-market-tries-to-shake-gamestop-angst-11612182450

©2021, Moneta Group Investment Advisors, LLC. These materials have been prepared for informational purposes only based on materials deemed reliable, but the accuracy of which has not been verified. Given the dynamic nature of the subject matter and the environment in which these materials were prepared, they are subject to change as additional information comes forth.  Past performance is not indicative of future returns. You cannot invest directly in an index. These materials do not constitute an offer or recommendation to buy or sell securities, and do not take into consideration your circumstances, financial or otherwise. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision.

The post Where Does This GameStop Story Go Next? first appeared on Moneta | Fee Only Financial Planning | Investment Advisors | Clients Nationwide.

source https://monetagroup.com/where-does-this-gamestop-story-go-next/

REFLECTING ON 2020: BE CAREFUL WHAT YOU’RE FEARFUL OF

By Luke Ferraro, Director of Investment Research

Many factors influence market returns: the economy, interest rates, business decisions, technology, worker productivity, sentiment and population growth – just to name a few. It is unfathomable to accurately predict all these factors with consistency, yet many market prognosticators will try again and again.

If anything is learned from 2020, one would hope a little humbleness has been accepted by investors. Early predictions for 2020 market returns would likely have centered around wholesale market carnage if one had known about the impending global pandemic, governmentinduced recession, swiftest equity market drawdown, increased social divisions and unending political strife. However, now given the benefit of hindsight, we can see predictions based on fears do not make for a robust investment regimen as fears do not always correlate to market returns.

As one looks at the last 12 months of market performance, the pace and depth of the market decline are clear. What is also obvious is the amazing recovery that took hold.

For a while, the market leaders tended to be those that would benefit from a post-COVID world, such as ones with growth prospects (technology companies and online consumer services). Others with a more uncertain outlook, such as small businesses and energy, faced a slower recovery of valuations as the market contended with fears over COVID, lockdowns and the upcoming US elections. Yet, as noted, fear-based investing can lead one astray from a long-term plan.

As the early November election wrapped up and vaccines for COVID received approvals, the market’s optimism turned on a dime. Suddenly, the outlook grew brighter and those sectors that had meandered along through the market recovery took the lead. Year-end then became something much less feared and returns finished on a high note, helping to dissipate the concerns that once overwhelmed 2020 market predictions.

As we enter 2021, a new set of fears arrive: the logistics and execution of the vaccine rollout, stimulus from monetary and fiscal policies and their lasting impact on the national debt and continued political and social fragmentation – to name a few.

As investors, we must guard against overreaction to fears. Willfully seeking to avoid one particular risk can inadvertently introduce risks we never intended. For example, concern over equity valuations may force one into the safety of fixed income, but now the risk of outliving one’s assets increases.

In the end, staying diversified with your financial assets remains the best way to protect against a variety of risks, especially the ones informed only by fear.

Look Ahead: Investment Themes for 2021

For all the continued fears one may perceive in 2021, we see market conditions and economic growth primed for growth and further recovery given the continued monetary support, expected fiscal impulse and improvement in vaccine distribution. As we highlight below, we are encouraged by the increasing breadth of asset class returns witnessed in the fourth quarter of 2020; this may suggest a start to a broader and more sustained increase in global economic growth.

A few themes we believe will impact markets are:

1. The Pandemic’s Wake

COVID-19 vaccine development and distribution efforts, once they fully take hold, boost the likelihood of harmonized economic growth normalization in 2021. Importantly, there is ample historical evidence that as the economy gains its footing and generates momentum, this positively impacts a broader set of asset classes. As highlighted below, activity in the markets in the fourth quarter of 2020 may offer a first hint for this potential moving forward.

Small cap and value-orientated equities produced substantial returns in the fourth quarter, improving market breadth heading into 2021.

2. Navigating a Low-Interest Rate Environment

Monetary support across the globe continues to be extremely accommodative and warranted given the magnitude of the impact of COVID-19 on economic activity and functionality of the global financial markets. However, given monetary policy support typically leans on low interest rates, we now face a diminished return expectation across fixed income asset classes.

Low-interest rates and tight credit spreads portend lower forward-looking returns in traditional fixed income.

Historically low interest rates, uneven global economic recovery and the potential for modest inflation volatility require attention to one’s fixed income allocation as 2021 begins. Investors may want to consider adding or increasing their exposure to high-yield funds in addition to maintaining a bond ladder with maturities in the 7- to 10-year range. While difficult, we recommend resisting the urge to stay ultra-short where the Fed has pledged to keep yields at or near zero until 2023.

3. International Equity Exposure

Lockdowns to slow the spread of COVID-19 introduced an unexpected catalyst for increased demand for productivity and entertainment solutions. The domestic technology sector subsequently benefited immensely with significant earnings growth and returns in 2020.

However, as we look into 2021 and see the potential for economic growth and broader asset class participation, companies hit hardest by the pandemic could experience dramatic earnings growth in 2021, which could drive higher returns for equity sectors and investment styles that lagged in 2020. One only has to look at how small cap and value equities performed in November and December last year to see this theme in effect. The same can be said for international and emerging equity markets, which produced advantageous returns as 2020 ended.

Relatively more attractive international valuations and the prospects of further U.S. dollar weakness support the prospects of international and emerging market equities.

A global economic recovery, prospects for further weakness in the U.S. dollar and stability within the commodity prices provide additional reasonings for improved prospects for international developed and emerging market equities. As highlighted above, relative valuation advantages persist across wide swaths of equity markets overseas, and the underlying composition of many of these markets sets them up to benefit in a prolonged global economic recovery.

Outlook Summary

As 2020 ended, the prospects for a broader economic reopening foreshadowed the benefits of portfolio diversification. Economic sectors and equity styles that lagged earlier in the recovery, such as small cap, value and international stocks, produced substantial returns in the last two months of the calendar year. The foundation for a continuation of this trend appears to be in place, although the path will be riddled with volatility as economic activity improves. As usual, portfolio diversification will still be key to helping portfolios achieve their investment objectives.

©2021, Moneta Group Investment Advisors, LLC. These materials have been prepared for informational purposes only based on materials deemed reliable, but the accuracy of which has not been verified. Past performance is not indicative of future returns. You cannot invest directly in an index. These materials do not constitute an offer or recommendation to buy or sell securities, and do not take into consideration your circumstances, financial or otherwise. You should consult with an appropriately credentialed investment professional before making any investment decision.

The post REFLECTING ON 2020: BE CAREFUL WHAT YOU’RE FEARFUL OF first appeared on Moneta | Fee Only Financial Planning | Investment Advisors | Clients Nationwide.

source https://monetagroup.com/reflecting-on-2020-be-careful-what-youre-fearful-of/

Ask the CFP: When will Social Security run out?

 

 

Hello everyone and welcome to this month’s Ask the CFP segment. This month’s question is, “When will Social Security run out?” According to the Social Security Board of Trustees, as of April of 2020, the retirement portion of Social Security, which is different than the disability side, is expected to be depleted by the year 2034. However, this doesn’t take into account the effects of COVID, which significantly reduced revenue into the Social Security trust from so many lost jobs. This means if Congress doesn’t take action sooner, the trust fund for retirees could be depleted before 2034.

A common misconnection about Social Security is that it will be gone once the trust funds are exhausted. Social Security income would still be available for retirees, but it’s expected to be reduced to 76% of what has been promised. This means Social Security income would still continue, but with a “pay cut.” As you can imagine, this topic is something few politicians have wanted to deal with because it isn’t an easy problem to solve.

At the end of the day, fixing Social Security is a math problem. Congress may decide to increase taxes on workers, decrease benefits on retirees, or both. What’s more likely to happen is some workers with higher incomes may pay more into the system and some retirees with higher incomes may receive less from the system. Also, we’ll likely see the normal retirement age extended further, especially since Social Security was originally meant to help people that lived past life expectancy, not to be a source of income for people that want to retire as soon as possible. We might also see Congress change the annual cost of living adjustment for all or some Americans. It won’t be easy, but Congress will need to take action one day to solve this. I have a feeling it will be the same the trust will be exhausted.

If you have a question about this topic or have a question for next month’s video, please send it to TFreeman@MonetaGroup.com. Thanks for watching and we’ll see you next month.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Please speak with a qualified tax or legal professional before making any changes to your personal situation.

© 2021 Moneta Group Investment Advisors, LLC. All rights reserved. These materials were prepared for informational purposes only based on materials deemed reliable, but the accuracy of which has not been verified. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. Past performance is not indicative of future returns. These materials do not take into consideration your personal circumstances, financial or otherwise.

The post Ask the CFP: When will Social Security run out? first appeared on Moneta | Fee Only Financial Planning | Investment Advisors | Clients Nationwide.

source https://monetagroup.com/ask-the-cfp-when-will-social-security-run-out/

Tax Planning: What to expect if you reversed RMDs under the CARES Act in 2020

By Brighton Samet, Moneta Tax Planning Consultant

Under guidance from the Internal Revenue Service (IRS), anyone who already took a required minimum distribution (RMD) in 2020 from certain retirement accounts had the opportunity to roll those funds back into a retirement account following the CARES Act RMD waiver for 2020. Instead of the normal 60-day limit, taxpayers had until August 31, 2020 to complete the rollover.

If you properly rolled over some or all of your IRA distributions, you may be wondering how the tax reporting will work. Your Form 1099-R will show the gross distributions for the year in Box 1. Unfortunately, you will not see the rollover reflected on this form. By May 31, you should receive a Form 5498 that will include documentation for the rollover that is also sent to the IRS. When preparing your tax return, the IRS instructions for Form 1040 (page 25) direct you to include the total distribution on Line 4a and to enter “Rollover” next to line 4b. The instructions also note that you may subtract the rollover amount when determining the taxable amount included on Line 4b. https://www.irs.gov/instructions/i1040gi

Since the Form 5498 may arrive after the tax filing deadline of April 15, we recommend you inform your tax preparer about any 2020 IRA rollovers so your distributions can be properly reported on the tax return.

While we hope you find it beneficial, this information is for informational purposes only and is not intended as tax advice.  Please consult your personal tax advisor or other appropriately credentialed professional for advice about your specific situation.

© 2021 Moneta Group Investment Advisors, LLC. All rights reserved. These materials were prepared for informational purposes only. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. Past performance is not indicative of future returns. These materials do not take into consideration your personal circumstances, financial or otherwise.

The post Tax Planning: What to expect if you reversed RMDs under the CARES Act in 2020 first appeared on Moneta | Fee Only Financial Planning | Investment Advisors | Clients Nationwide.

source https://monetagroup.com/tax-planning-what-to-expect-if-you-reversed-rmds-under-the-cares-act-in-2020/

The Expanded and Enhanced Employee Retention Credit

ERC is a refundable payroll tax credit available to businesses for wages paid to employees

We have all heard in exhaust about the Payroll Protection Program (PPP), which was rolled out as part of the CARES Act during the pandemic’s early stages. When PPP was introduced, there was (and still is) a plethora of media coverage. Numerous Treasury Releases and IRS Notices subsequently followed to provide further clarity.

However, another stimulus is available for businesses which can also be extremely beneficial – the Employee Retention Credit (ERC). The CARES Act also introduced the ERC, and at that time if a business received PPP, it was ineligible to claim the ERC. However, this limitation was recently retroactively eliminated under the Consolidated Appropriations Act, 2021 signed into law on December 27, 2020.

So, what is the ERC? Simply put, the ERC is a refundable payroll tax credit available to businesses for wages paid to employees. But since nothing is as simple as it may seem in today’s world, we have prepared the following overview of the ERC’s main provisions and a few key items to consider:

Eligible Employers

All employers, including tax-exempt organizations, are eligible if they meet one of the following requirements (see below: eligible wages are calculated differently for small businesses):

1. The business had to fully or partially close during any calendar quarter because of governmental orders limiting commerce, travel, or group meetings due to COVID-19.
2. The business had a significant decline in gross receipts. The gross receipts are looked at on a quarterly basis and compared to 2019 (for 2020 and 2021).
   1. Significant Decline for 2020:  Gross receipts had to decline more than 50% compared to the same 2019 calendar quarter.
   2. Significant Decline for 2021:  Gross receipts had to decline more than 20% compared to the same 2019 calendar quarter.

Eligible Wages

Eligible wages are defined as employee wages and health care expenses paid during the applicable period up to a maximum of $10,000 per employee. Healthcare expenses are retroactively eligible to be included as wages for all employees, even if they did not receive any other wages (for example: furloughed employees). Note that wages used in calculating PPP loan forgiveness cannot be used toward calculating the ERC (no double-dipping). Therefore, to receive the ERC, a business will need to have paid qualified wages above the amount of the forgiven PPP loan used to pay other wages.

Wages are classified differently for small businesses and non-small businesses:

1. For small businesses (100 or fewer employees for 2020; 500 or fewer employees for 2021) – all wages are included in the calculation.
2. For larger employers (more than 100 employees in 2020 and more than 500 employees in 2021) – only wages paid to employees who were being paid and not providing services (i.e., not working) are included.

Calculating the Credit

The Consolidated Appropriations Act, 2021 enhanced the ERC by increasing the number of credits allowable and how often a business can claim them. For businesses receiving the ERC in 2020, the credit is equal to 50% of eligible wages up to $10,000 (or $5,000 of credit) per employee. For 2021, the enhanced credit is equal to 70% of eligible wages up to $10,000 (or $7,000 of credit) per employee, per quarter. Since the credit is available through June 30, 2021, this means a qualifying business can claim the ERC two times in 2021 for a total of $14,000 per employee!

As you can see, the second round of economic stimulus has dramatically enhanced and expanded the ERC, primarily by eliminating the rule that a business cannot benefit from both the PPP and the ERC. Employers should review their employee counts and operations to determine the extent to which they may be eligible for enhanced and/or increased ERC either in 2021 or by filing amended employment tax returns for qualified wages paid in 2020.

Compardo, Wienstroer, Conrad & Janes will continue to analyze this legislation and provide updates relevant to our clients. Our staff of diverse professionals stays informed to help you make better financial decisions. We serve Family Office, Professional Athletes and Family CFO clients. You can visit our website here.

© 2021 Moneta Group Investment Advisors, LLC. All rights reserved. These materials were prepared for informational purposes only based on materials deemed reliable, but the accuracy of which has not been verified. Given the dynamic nature of the subject matter and the environment in which these materials were prepared, they are subject to change as additional legislation and government analysis come forth. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. These materials do not take into consideration your personal circumstances, financial or otherwise.

 

The post The Expanded and Enhanced Employee Retention Credit first appeared on Moneta | Fee Only Financial Planning | Investment Advisors | Clients Nationwide.

source https://monetagroup.com/cwcj-the-expanded-and-enhanced-employee-retention-credit/

Key Details of The Consolidated Appropriations Act, 2021

While there are many similarities to the original PPP, the CRRSAA introduces some important changes.

On Sunday, December 27, 2020, President Trump signed the Consolidated Appropriations Act, 2021. The bulk of the provisions within this $2.3 Trillion, 5,000 plus page package are part of an annual omnibus spending bill of approximately $1.4 trillion. The remaining estimated $900 Billion is designated for the second round of COVID stimulus, referred to as the “Coronavirus Response and Relief Supplemental Appropriations Act of 2021” (CRRSAA).

This legislation is a giant piece to unpack and will require further review. Before diving into the relevant details of the legislation, it is important to note a few items that were left out:

1. While previous COVID relief suspended Required Minimum Distributions (RMDs) in 2020, there is no such relief in 2021, and you can expect RMDs as usual.
2. No additional rollover relief for unwanted 2020 RMDs. Notice 2020-51 provided relief for rollovers through August 31, 2020. There was no additional reprieve added.
3. While initial student loan relief provided in the CARES Act was extended through January 31, 2021, no additional student loan relief was granted under the CRRSAA.

Key provisions:

Stimulus Checks

A refundable tax credit of $600 will be issued for each eligible taxpayer and dependent under age 17. Parents will not receive stimulus for dependents 17 and over, as they are not considered qualifying children. Furthermore, dependents 17 and older will not receive a stimulus check. For example, a 19-year-old college student is claimed by their parents as a dependent. Neither the parents nor the student will receive a stimulus check.

The phaseout will be the same as the CARES Act. The Adjusted Gross Income (AGI) thresholds are:

• $75,000 for single filers
• $112,500 for heads of households
• $150,000 for married filing joint

The phaseout is $5 of credit for every $100 above the indicated AGI figures above.

Payroll Protection Program (PPP)

While there are many similarities to the original PPP, the CRRSAA introduces some important changes, most of which are retroactive:

1. Expenses paid with PPP funds are now tax-deductible whether the loan is forgiven or not; this applies to all PPP loans.
2. For all PPP loans, recipients may choose an 8 or 24 week covered period, no matter when they received their PPP funds.
3. Eligible payroll costs are expanded to include group insurance benefits for life, disability, dental, and vision. This clarification will help many businesses in meeting the 60% payroll threshold for loan forgiveness.
4. Four new categories of expenses are introduced to cover items specifically related to the additional expenditures or losses for coronavirus related items (operational expenditures, property damage costs, additional supplier costs, and employee protection expenditures). These expenses fall into the 40% non-payroll related expense category for loan forgiveness.
5. A simplified forgiveness form was created for loans under $150,000. The bill specifically states the new form will not be longer than one page, and not require substantiating documentation when filed. The SBA will need to have the form available within 24 days of the bill being signed into law.
6. A second round of PPP is being offered. This round is being referred to as PPP2 or second draw loans. To qualify, the business must have received PPP in the first round and spent all said funds. The window for businesses to apply for their first round of PPP will be reopened. Those who did not apply or who might have returned the funds will have the opportunity to re-apply. Changes to PPP2 from the CARES Act include:
   1. Reduction in employees for most businesses to 300 (previously 500).
   2. A business must have experienced more than a 25% decline in revenue in any one quarter in 2020 compared to the same quarter in 2019 (new requirement).
   3. Reduction in max PPP2 funds to $2 Million (previously max $10 Million).

 

Unemployment Benefits

Unemployment benefits are extended for an additional 11 weeks with a federal supplement of $300 per week ($600 with the CARES Act). The CRRSAA also extended the Pandemic Unemployment Assistance (PUA) Program which covers non-traditional workers not typically eligible for unemployment, such as self-employed individuals.

Employee Retention Credit

The Employee Retention Credit was expanded and improved and can now be taken through June 30, 2021. The total amount of eligible wages per employee increased from $10,000 for the year to $10,000 per quarter. The credit was also increased from 50% to 70% per eligible employee. The CRRSAA also provided less significant hurdles for businesses to qualify for the benefit by decreasing the year-over-year gross receipts decline from 50% to 20% and increasing the number of employees counted from 100 to 500.

This bill also contains retroactive provisions allowing employers who received PPP funds also to be able to utilize this credit for wages not covered by PPP. Also, group health plans can now be considered wages when paid to eligible employees even when no other wages are paid.

Charitable Deductions

Above the line charitable deductions that were introduced by the CARES Act were expanded. For 2020, the $300 deduction is still available. However, the benefit was expanded in 2021 to remove the marriage penalty, allowing for joint filers to deduct $600 of cash contributions if they do not itemize their deductions.

The bill extends the ability to deduct 100% of cash contributions to qualified 501(c)3 organizations in 2021, removing the 60% AGI limitation set by the Tax Cuts and Jobs Act.

Please note this provision does not apply to cash contributions to donor-advised funds.

Business Meal Deduction

The bill provides for a 100% deduction for certain meal expenses for businesses in 2021 and 2022 provided by restaurants. The goal of this provision is to provide more stimulus to restaurants and is not retroactive to 2020. Expect additional guidance from the IRS on how this deduction will be implemented.

Student Loans

As discussed above, there is no additional reprieve for student loan payments at an individual level. However, the preferential treatment for student loans paid by employers (up to $5,250 per year) has been extended through 2025. Such payments are not included as a payroll expense and are not included as income to the employee, though it is still deductible by the employer.

Flexible Spending Accounts

There is additional relief for Flexible Spending Accounts (FSAs). This relief applies for both medical FSAs and Child Care FSAs. The relief is available in a few different ways. However, it is up to the employer to adopt how they will enact these available changes within their plans. The most generous option is to roll unused funds into 2021, and unused 2021 balances forward to 2022. Another option employers have permits a 12 month grace period in 2020 and/or 2021. Also, in 2021 employers may provide participants with the option to amend their contributions to the FSA plans.

Medical Deductions

The AGI limitation for Medical Expense Deductions has been permanently set to 7.5%.

Conclusion

Compardo, Wienstroer, Conrad & Janes will continue to analyze this legislation and provide updates relevant to our clients. Our staff of diverse professionals stays informed to help you make better financial decisions. We serve Family Office, Professional Athletes and Family CFO clients.  You can visit our website here.

© 2021 Moneta Group Investment Advisors, LLC. All rights reserved. These materials were prepared for informational purposes only based on materials deemed reliable, but the accuracy of which has not been verified. Given the dynamic nature of the subject matter and the environment in which these materials were prepared, they are subject to change as additional legislation and government analysis come forth. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. These materials do not take into consideration your personal circumstances, financial or otherwise.

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