How to Address Rising Tax Problems During COVID-19

COVID-19 has caused the death of over 300,000 people. There have been nearly 19 million reported cases in the United States. COVID-19 has touched nearly every aspect of the lives of every American.

It has even affected finances for most Americans as well, creating waves of economic stress. It will have some tax implications that many people have not considered. For some, it can mean simply reporting income or expenses differently. For others, it may mean having to pay additional income taxes that they had not planned.

Regardless of the situation, this year might be the year that you need to bring in a tax professional to help address some of the tax challenges that COVID-19 has caused.

Examples of Tax Complications Due to COVID-19: Unemployment and Retirement Plan Withdrawals

As individuals are losing their jobs or had to decrease work because of COVID-19, they are turning to other sources of income such as unemployment benefits and dipping into their retirement savings plans.

For those who are tapping into these funds for the first time, they might have questions about taxation—and they may not realize that they may have to pay taxes on these additional income sources.

Are unemployment benefits taxable?

Your unemployment benefits will be fully taxable at the federal level.

In general, unemployment benefits might be taxed by the state as well, depending on where you live. For example, Alabama and Califiornia do not impose any taxes on unemployment benefits, but the benefits are fully taxable as regular income in Iowa. Some states will only tax part of your benefits.

Are retirement benefit withdrawals taxable?

If you take out retirement benefits early, there is a 10% penalty imposed on any funds you remove. However, tax changes because of COVID-19 allowed individuals to take out funds from retirement without paying the 10% penalty as long as the withdraw took place during 2020. You must also meet certain requirements that indicate you have a stressful financial situation because of COVID-19.

Even if you meet the qualifications, avoiding the 10% penalty is not the only tax that you must pay. Instead, the money you take out is often taxed as income, depending on how your retirement plan was established.

Many people may not realize that they will face this additional tax hit after January 1, so they have not been planning for it over the past few months.

Dealing with the IRS and Unique Tax Problems After COVID-19

The best way to ensure that you are addressing tax issues appropriately is to get professional tax help. If you will owe taxes from 2020, you might be able to work out a deal with the IRS to decrease your tax obligations, for example.

If you get a notice from the IRS about taxes that you owe, you have a few options that you can use to address it.

• Make a full payment. You can pay the amount demanded in full by the due date noted on the notice. However, this might not be the best course of action, as the amount that the IRS says is due might not actually be accurate. Check with a tax professional before you make any additional payments.
• Create an installment agreement. You can work with your tax professional and the IRS to create an installment agreement to pay the tax obligation over time. If you work with the taxing authority directly, they will often demand a large monthly payment. Using a professional to help you negotiate will usually decrease this payment and help you create a plan that actually works for you.
• Suggest an offer in compromise. An offer in compromise is a technical term that means you are offering to settle your debt with the IRS for a lesser amount than what the IRS is demanding. Using this compromise method often requires a showing that you cannot afford to pay the full amount, even if you created an installment plan. A tax professional will be able to help you develop this type of offer and present it in a way that is most likely to be accepted.

Having a professional on your side to help you deal with tax preparation, back taxes, tax problems, and negotiations with the IRS can be invaluable. Do not work through this process alone, especially if COVID-19 has created some unique tax issues for you in 2020.

Deciding if a Roth IRA Conversion is For You

Roth IRAs can be a powerful tax tool, but they are often misunderstood and misused. Investment income in Roth IRAs compound tax-free and most distributions are tax-free as well. Another benefit is that there are no required minimum distributions (RMDs) throughout the original owner’s life. Long-term Roth distributions are tax-free to the beneficiaries who inherit the IRA as long as they fully distribute the Roth within 10 years of inheriting.

As the annual contribution limits are rather small, most Roth IRA contributions are made by converting a traditional IRA to a Roth IRA. The downside to conversion is that you will have to pay tax on the gross amount converted. Considering this can require a substantial cash outlay and that all the Roth IRA benefits are backloaded, deciding to make a conversion can be a difficult call.

Most people are not sure it will pay off in the long term and do not like the idea of paying taxes now instead of in the future. Consequently, too often people try to make a conversion decision through intuition instead of objectively considering the important factors.

It is best to use a spreadsheet to do an analysis or work with a tax advisor because you will need to consider many factors, including assumptions about tax rates, investment returns, how long you will own the accounts, how much you will convert, etc.

Generally, a conversion becomes more advantageous if tax rates increase and this impact is compounded by higher investment returns. Finally, remember that you can leave the Roth to your heirs who can take distributions tax-free.

Roth IRA conversions are not the right option for everyone, but where it is appropriate the benefits can be substantial.

How Will the Biden Administration’s China Policy Impact Markets?

The Obama and Trump administrations could not have had more different approaches when it came to U.S. relations with China. As the Institute for China-America Studies (ICAS) explains, under the Obama administration, the United States favored a trade and investment approach when dealing with China, while the Trump administration had a national security focus. The ICAS believes the Biden administration will address trade and economic imbalances through a modified approach, including reducing tariffs on imported Chinese goods over time to decrease inflation for American consumers. Another example is maintaining pressure on China to cut government subsidies for competing industries, currency games, and exporting products to the United States at artificially low prices.

While the Obama administration engaged China through trade and investments, it did not emphasize engaging the country on the national security side. The Trump administration looked to make American industries independent of Chinese production, especially for rare earth metals, pharmaceutical precursors, etc. With the inauguration of President-elect Biden, the incoming administration is expected to maintain the Trump administration’s quest to give many American industries a fighting chance of survival, albeit how it will be accomplished will likely vary.

The Biden administration is projected to lower tariffs on Chinese imports gradually. This is expected to be done to reduce the tension of the existing trade war. It’s also expected to be done to lower the rate of inflation and help businesses that import input materials from China.

Based on statistics according to the American Action Forum, consumers paid approximately $57 billion on an annual basis per 2019 import numbers due to tariffs instituted by President Trump. This action is likely to increase consumer spending and increase companies’ earnings. However, the Biden administration is still expected to keep other forms of trade pressure on what many believe are unfair trade practices by China.

Additionally, Biden is expected to raise the same concerns the Trump administration did regarding Chinese trade and commerce, including China subsidizing its industries, flooding the American market with goods to undercut American producers, and requiring so-called forced technology transfers from U.S. companies.  However, the trade deficit the U.S. has with China isn’t expected to see much attention. This could negatively impact how much China is ultimately expected to import from the United States.

When it comes to colleges and universities, research-based collaboration, and artistic-based areas, relations are expected to be more friendly. However, when it comes to fighting China’s human rights violations, individuals or business entities might be targeted. Based on Vice President-elect Kamala Harris’ proposed Uyghur Human Rights Policy Act of 2020, there is an expectation the Biden administration will keep the pressure on China.

Beginning in 2017, Biden began to discuss plans for America and how some of America’s crucial industries could be more self-sufficient and less reliant on China. Examples include pharmaceutical products, medical equipment, and rare earth minerals.

Potential actions the Biden administration could implement against China include sanctions; U.S. government-sponsored legal action against Chinese firms; and becoming more involved in the World Trade Organization (WTO) and similar organizations. This is seen by some as the U.S. becoming more in-step with Europe to better pressure China in WTO and related disputes. It might also include courting America’s allies in reducing or prohibiting Chinese investment of domestic industries to make it more difficult for Chinese firms to obtain cutting-edge technology.

While there is no way to accurately predict how the Biden administration will treat China, there will likely be continued pushback on China. How these actions will ultimately impact trade and the markets will be seen in the near future.

COVID-19 Vaccination Considerations for Employers

Looking at a 2009 letter from the U.S. Department of Labor, Occupational Safety and Health Administration (OSHA), employers may be able to require their employees to take the COVID-19 vaccine, with a few exceptions (such as the likelihood of a life-threatening reaction to it). With the COVID-19 vaccine being rolled out, how can employers balance workplace safety, maintain productivity, and stay within the law?

According to the Centers for Disease Control & Prevention (CDC), the early vaccination stages will likely focus on those who are at particular risk of severe and life-threatening complications from COVID-19. This is expected to include elderly individuals, especially those who live in nursing homes. It is also expected to include frontline healthcare workers who may be exposed to COVID-19 and could expose patients to COVID-19.

Looking to the Past for Guidance on Employer Vaccine Mandates

The natural question for employers is if and how they are able to mandate a COVID-19 vaccination for employees. When it comes to OSHA and the U.S. Equal Employment Opportunity Commission (EEOC), neither agency has given any actionable guidance on mandating the COVID-19 vaccine.

In light of an Emergency Use Authorization (EUA) for both the Pfizer and Moderna vaccines, further government agency direction is likely to follow over the next few months. Until there is more definitive guidance, the most relevant and likely direction is to look back at how the different agencies handled this same question with the H1N1 epidemic.

U.S. Equal Employment Opportunity Commission

In 2009, the EEOC provided guidance based on the Americans with Disabilities Act (ADA) and Title VII of the Civil Rights Act of 1964, which state that employers are within their right to mandate that workers take the flu shot. However, for workers with disabilities that prevent them from receiving inoculations and for workers objecting to vaccines according to their religious beliefs, their employer must provide a “reasonable accommodation.”

If a reasonable accommodation is available, the employer is responsible for providing it. However, according to the ADA, if a reasonable accommodation is not available, if it would create an “undue hardship” for the business, or if the worker would “pose a direct threat” to their coworkers’ well-being and welfare that isn’t able to be reduced via the reasonable accommodation, employers aren’t required to provide that reasonable accommodation.

When it comes to the subjectively reasonable accommodation and undue hardship test, the employer must look at the worker’s individual disability, his role and what responsibilities it entails, the type of vaccine being mandated, and the employer’s circumstances. For example, if someone cannot be vaccinated, they may be accommodated by continuing to work remotely, work within the constraints of social distancing guidelines, face masks, etc. However, if the worker’s role requires close contact with others, the ability of the employer to accommodate the employee will be more in question.

Title VII similarly requires business owners who mandate vaccines as a requirement of employment to make reasonable accommodations for workers who assert a sincerely held religious belief, practice, or observance that prevents the worker from accepting a vaccine. In this case, employers may ask the employee who claims a religious exemption for reliable documentation attesting to the religious objection.

Much like the ADA, Title VII also states that if the reasonable accommodation causes an undue hardship, the employer is not required to make such an accommodation. One distinction for this exception under Title VII is that the undue hardship standard is met when the “more than de minimis cost” to the business is reached. For the ADA’s undue hardship threshold to be met, the accommodation in question must create significant difficulty or expense. For employees who have non-religious beliefs that they explain prevents them from taking a vaccination, this is not covered under Federal Law but might be applicable in certain states.

Looking back to 2009, an OSHA letter stated that businesses can require employees to take a seasonal flu vaccine, with some caveats. One exception is if they have a pre-existing medical condition that can cause grave illness or death, they may qualify for an exemption. As the EEOC suggests, asking and not mandating that employees get vaccinated might garner good results before there is any pushback from a vaccination mandate.

Businesses can offer vaccines at their place of work, paying for it for every employee who wants it. However, in the course of offering vaccines for workers, logistics must be considered because things are still evolving as the two vaccines (and others) are projected to become more and more available. Employers must consider the time frame of availability for vaccines (depending on the business’ industry, workers’ ages, etc.), pay for time spent on vaccination (potentially if there’s a reaction, etc.), how payment for vaccines will work, delivery and storage of the vaccine, etc.

While the rollout for the COVID-19 vaccine is ongoing, now is the time for employers to determine how they will handle the inoculation with their employees.

 

Sources

https://www.osha.gov/laws-regs/standardinterpretations/2009-11-09

https://www.eeoc.gov/laws/guidance/pandemic-preparedness-workplace-and-americans-disabilities-act

https://www.eeoc.gov/foia/eeoc-informal-discussion-letter-254

Key Changes to the Employee Retention Credit

On December 27, 2020, President Trump signed the Consolidated Appropriations Act, 2021 (CAA) into law. A recent article from JD Supra outlines two key provisions included in the act that make changes to the employee retention credit.

Established by the CARES Act, the employee retention credit was designed to incentivize employers to maintain their staff in the midst of the coronavirus pandemic. For the period from March 13, 2020 to December 31, 2020, eligible employers could claim a 50% retention credit for qualified wages, capping out at $5,000 per employee.

The CAA both extends and expands the employee retention credit, including making retroactive changes to it for 2020. It does so via two provisions:

Section 206 – This provision makes retroactive changes back to March 13, 2020, when the ERC was established. Firstly, the ERC is now eligible for recipients of loans through the Paycheck Protection Program (PPP). Previously, PPP participants were barred from claiming the ERC. Employers should note that they may not claim the ERC on wages paid with forgiven PPP loan funds.

Secondly, Section 206 offers clarification regarding “qualified health plan expenses” and the ERC. It explains that these expenses are, indeed, eligible for the ERC, even when they are attributable to a furloughed employee who is not receiving any other compensation at the time.

The third change—another clarification—is in regard to the “gross receipts” test for tax-exempt organizations. In determining their eligibility for the ERC, tax-exempt organizations must account for all gross receipts, not just those from unrelated trade or business activities.

Lastly, Section 206 offers employers a means for catching up on unclaimed ERC for 2020. Employers should claim the additional ERC on their fourth quarter Form 941, which is due by January 31, 2021. Further guidance in this area is expected this month.

Section 207 – This second provision includes an extension of the ERC for the period from January 1, 2021 to June 30, 2021. Additionally, it expands the ERC in the following ways:

• Increases the credit from 50% to 70%, for the portion of 2021 that the ERC covers.
• Adjusts the per-employee cap on the ERC to $7,000 per quarter.
• Decreases the eligibility threshold from a 50% decline in gross receipts to a 20% decline.
• Expands eligibility for the ERC from employers with up to 100 employees to employers with up to 500 employees.
• Eliminates the qualified wages cap for employee pay increases.
• Eliminates the option to receive advance payment of the ERC via IRS Form 7200 and/or IRS Form 941 for employers with more than 500 employees.
• Expands the availability of advance payments of the ERC for employers with 500 or fewer employees.
• Creates a process for repaying advance payments of the ERC, in the event of excess payments.
• Makes some governmental employers eligible for the ERC in 2021.
• Maintains the non-eligibility of the ERC for wages accounted for under IRC Section 45S and expands the non-eligibility to also cover wages accounted for under IRC Section 41, IRC Section 45A, IRC Section 45P, IRC Section 51, and IRC Section 1396.
• Requires the U.S. Small Business Administration and the IRS to coordinate in a public awareness campaign targeting employers eligible for the ERC.

For further details, click here to read the article in full at JD Supra.

New Paycheck Protection Program Guidance Released

On Wednesday, January 6, the U.S. Small Business Administration (SBA) and the Treasury issued joint guidance regarding the latest updates to the Paycheck Protection Program (PPP), as amended by the recent COVID-19 relief bill. A recent article from the Journal of Accountancy offers an overview of the guidance, which includes the following items:

1. An interim final rule titled, “Business Loan Program Temporary Changes; Paycheck Protection Program as Amended” – This document includes a consolidation of PPP rules for borrowers using the program for the first time. It also gives an explanation of program changes made by the recent COVID-19 relief legislation. Click here to read the document in full. 
2. An interim final rule titled, “Business Loan Program Temporary Changes; Paycheck Protection Program Second Draw Loans” – This document covers the various regulations for businesses that received PPP loans through the initial program and now want to pursue a second-draw loan. Click here to read the document in full. 
3. Additional guidance titled, “Guidance on Accessing Capital for Minority, Underserved, Veteran and Women-Owned Business Concerns” – This document gives details on the SBA’s commitment to opening the second PPP application window exclusively to minority- and women-owned businesses for the first two days. Click here to read the document in full.

The article offers a helpful overview of a number of PPP details that have changed with this second round of loan funding, including the following:

• Second-draw PPP loans of up to $2 million are available for eligible businesses that received first-round funding. Eligibility requirements include having 300 or fewer employees; having used the entirety of the first-round funding on eligible expenses prior to receiving second-draw funding; having experienced a reduction in revenue of 25% or more, comparing an eligible time period in 2020 with one in 2019. 
• Businesses that did not receive PPP funding in the first round may be eligible for second-round PPP funding if they meet the following criteria: having 500 or fewer employees and being eligible for other SBA 7(1) loans; being a sole proprietor, independent contractor, or eligible self-employed individual; being a non-profit; being an operation in the accommodation and food services sector with fewer than 500 employees at a single physical location; being a Section 501©(6) business league with 300 or fewer employees; certain qualifying news organizations.
• The maximum allowable amount for both first- and second-draw PPP loans is 2.5 times the organization’s average monthly payroll, though some eligible businesses can receive up to 3.5 times their average monthly payroll. For first-draw PPP loans, the maximum tops out at $10 million. 
• In addition to the original definition of “eligible costs” for the purpose of PPP loan usage, PPP loans from the second round of funding can be used to cover PPE and facility modification, property damage related to public disturbances not covered by insurance, expenditures for purchases essential to current operations, and certain covered operating expenditures.
• The latest COVID-19 relief bill included specific provisions for PPP applicants that are minority, underserved, veteran, and women-owned businesses. This includes certain amounts of PPP loans set aside for these groups and other commitments by the SBA to insure that businesses in these categories are served through the PPP program. 

The timeline for the second PPP application window is as follows:

• January 11, 2021 – Applications for first-draw PPP loans can be submitted by community financial institutions.
• January 13, 2021 – Applications for second-draw PPP loans can be submitted by community financial institutions.
• To be announced – Applications for first- and second-draw PPP loans can be submitted by all participating lenders.
• March 31, 2021 – The second PPP application window closes. 

For more details on the second application window for PPP loans, check out this article from the Journal of Accountancy. 

To apply for PPP funds in this second round of funding, first-time borrowers should use Form 2483 – Paycheck Protection Program Borrower Application Form and borrower seeking second-draw loans should use Form 2483-SD – PPP Second Draw Borrower Application Form. For more details on these forms and the procedures that accompany them, click here for a helpful article from the Journal of Accountancy.

Congress Enacts Additional Stimulus Legislation

On December 22, 2020, Congress passed the Consolidated Appropriations Act, 2021 (CAA2021), which includes $892 billion in coronavirus stimulus spending. This long-awaited and highly contested piece of legislation ties coronavirus relief funding into a $1.4 trillion resolution for funding the federal government through September of next year. The nearly $900 billion in stimulus funds comprises a variety of measures, including a renewal of enhanced unemployment benefits, an extension of the Paycheck Protection Program, and another round of individual stimulus payments. Read on for a breakdown of the various COVID-19 stimulus measures included in CAA2021.

 

INDIVIDUAL MEASURES

 

Unemployment Benefits

Portion of the stimulus package: $120 billion

An extension of federal unemployment supplemental benefits through March 14, 2021 at a rate of $300 per week.  Additionally, it legislates an extension of two pandemic unemployment programs set to expire at the end of December, the Pandemic Unemployment Assistance program, which has been expanded to provide aid to self-employed, temporary, and gig workers, and the Pandemic Emergency Unemployment Compensation Program, which provides an additional 13 weeks of benefits beyond the typical 26 weeks that states provide to jobless workers.

 

Extension of Eviction Moratorium & Rental Assistance

Portion of the stimulus package: $25 billion

A temporary extension of the federal eviction moratorium through January 31, 2021 and $25 billion in emergency rental assistance.

 

Economic Impact Payments

Portion of the stimulus package: $166 billion

Direct payments of $600 for qualifying adults and their child dependents. Individuals earning up to $75,000 annually (or married couples making up to $150,000) qualify for the full payment; individuals earning between $75,000 and $99,000 qualify for a reduced payment; individuals earning more than $99,000 do not qualify.

 

Food Aid

Portion of the stimulus package: $13 billion

Additional funding for the Supplemental Nutrition Assistance Program and a benefits increase of 15% to last for six months.

 

BUSINESS MEASURES

 

Paycheck Protection Program Extension (PPP2)

Portion of the stimulus package: $284 billion

CAA2021 provides an additional round of funding for the PPP and expands eligibility to include nonprofits (Sec. 501(c)(6)), local newspapers, TV stations, and radio stations. Additionally, it ensures the tax deductibility of business expenses paid with loan funds that are forgiven, a measure that has been widely called for by loan recipients and the American Institute of Certified Public Accountants (AICPA). For further details on PPP2, click here to read a helpful summary from the Journal of Accountancy.

 

Support for Entertainment Venues

Portion of the stimulus package: $15 billion

Funds for struggling live venues, independent movie theaters, and cultural institutions.

 

Support for Business in Low-income Communities

Portion of the stimulus package: $12 billion

Funds earmarked for businesses in low-income and minority communities.

 

Economic Injury Disaster Loan Grants

Portion of the stimulus package: $20 billion

Additional funds to be administered through the Economic Injury Disaster Loan (EIDL) program that are dedicated to businesses in low-income communities.

Support for Child Care Centers

Portion of the stimulus package: $10 billion

Aid money to help child care centers safely reopen and to support families with child care costs. The money is to be administered via the Child Care Development Block Grant.

 

Aid to Transportation Sector

Portion of the stimulus package: $45 billion

A variety of transportation-related assistance that includes $16 billion for airlines (for paying the salaries of workers and contractors), $14 billion for mass transit agencies, $10 billion for highways, and $1 billion for Amtrak.

 

ADDITIONAL MEASURES

 

Support for Education Institutions

Portion of the stimulus package: $82 billion

This money is designated to help schools and universities reopen. The funds are earmarked as follows: $54 billion for public K-12 schools, $23 billion for colleges and universities, $4 billion for the Governors Emergency Education Relief Fund, $2.75 billion for private K-12 education, and nearly $1 billion for Native American schools.

 

Funding for Vaccine Distribution and Coronavirus Testing

Portion of the stimulus package: $68 billion

CAA2021 includes money for both supporting the distribution of coronavirus vaccinations and for helping to pay for costs associated with COVID-19 testing. $30 billion is directed for the procurement of vaccines and treatments, the funding of distribution for states, and the creation of a strategic stockpile. $22 billion is earmarked for testing, tracing, and mitigation. Of the remaining funds, $9 billion will go to healthcare providers and $4.5 is earmarked for mental health.

 

Increased Broadband Access

Portion of the stimulus package: $7 billion

Funding for broadband initiatives to support better connectivity and infrastructure. $3.2 billion is earmarked for the Emergency Broadband Benefit, which provides low-income families and individuals laid off or furloughed due to the pandemic with a monthly stipend of $50 to pay for internet services. $1.9 billion is dedicated to financing “rip and replace” projects—the removal and replacement of Huawei and ZTE networking equipment. $1 billion will go to Tribal broadband programs and $300 billion is dedicated to rural broadband deployment.

 

Farm Aid

Portion of the stimulus package: $13 billion

Funding for farmers and ranchers.

 

Postal Service

Portion of the stimulus package: $10 billion

CAA2021 includes the forgiveness of a $10 billion loan made to the United States Postal Service earlier this year.

 

WHAT’S NOT INCLUDED

 

A number of provisions that were initially included in proposed coronavirus stimulus legislation were, ultimately, left out of the bill. These include protection for businesses against litigation regarding COVID-19 exposure, financial aid to state and local governments, and an extension of federal student loan forbearance.

 

It is unknown if President Trump will sign this into law. You can have full confidence that we will keep you apprised of any key developments, including whether the President signs the bill or not, if Congress makes any changes to the legislation, and, in the case of a presidential veto, whether Congress is expected to be able to override the veto.

How Will the Biden Administration Influence the Federal Reserve?

With the nation on the precipice of a transition of administrations on Jan. 20, 2021, there will need to be many roles filled both in and out of the White House. With the potential for Janet Yellen to replace Steven Mnuchin as the next treasury secretary, there is much speculation about how the Federal Reserve will be shaped by the Biden administration.

Predicting Changes to the Federal Reserve

When 2022 arrives, Chair of the Federal Reserve Jerome Powell’s term will expire. While presidents have historically given another term to first-term chairs who were appointed by the outgoing administration, there is no indication that Powell will stay on for another year. President Trump deviated from this norm when he appointed Powell to replace then-Chair Janet Yellen. Originally appointed by Obama to the Fed in 2012, Powell was first a Fed governor and a Republican politically.

First Vice Chair Richard Clarida’s term expires in January 2022. Vice-Chair of Banking Supervision Randal Quarles’ term expires in October 2021. Both vice-chairs are expected to be replaced when their terms are up.

With two Fed board seats still unfilled, and if the Biden administration nominates Fed Governor Lael Brainard to become the next Treasury Secretary, it would create a third Fed board seat opening. Brainard is favored as a strong candidate because many economic experts see a need for the Fed and the U.S. Treasury to work together closely.

While President Trump attempted to fill one of the empty Fed seats with Judy Shelton, on Nov. 17 the U.S. Senate declined her nomination to sit on the Federal Reserve Board of Governors; Christopher Waller still could be confirmed during the Senate’s post-election session. Assuming he doesn’t get confirmed before Congress adjourns and 2020 closes, the nomination will expire.

What’s Not Expected to Change

When it comes down to how the Fed handles monetary policy, chances are things will not change much from the current status quo. Since the U.S. economy is still in a malaise due to the harmful effects of the COVID-19 pandemic, the Fed has made a crystal-clear statement that interest rates will remain at “near zero” for the next 36 months, at a minimum.

In August 2020, the Fed announced that it was recommitting itself to maintain existing rates as the economy emerges from the downturn for a longer period of time, compared to past Federal Reserve efforts to spur economic growth. Then on Nov. 5, the Federal Reserve’s FOMC Statement reinforced that the federal funds’ rates will stay at 0 percent to ¼ percent, as long as economic growth is threatened.

Promoting Diversity

Part of the Democrats’ legislative agenda is for the Fed to take action to reduce racial inequality. The objective is for this to become part of the Fed’s existing mandate, which currently includes price stability and maximum employment. If President Biden endorses this legislation, it would likely have an even greater impact on the Fed.

Another area to consider is that Biden is expected to appoint more minorities to the FOMC which, with the exception of Janet Yellen serving a four-year term, has been all white men.

Many at the Fed already recognize the importance of including all Americans in opportunities to benefit from a robust economy. During August 2020, the Fed announced that it is taking its time boosting interest rates, in contrast to how it handled past economic challenges, in order to produce an economy that favors job seekers, especially minorities.

Chairman Jerome Powell explained to the media that the Fed is ready and able to implement its financial instruments to prop up the economy and ensure that the country’s emergence from COVID-19 will be assisted. Powell has called on Congress to pass more stimulus, especially to help those who lost jobs from the pandemic.

Depending on who is selected and confirmed as treasury secretary, there could be a renewed hope for recently discontinued stimulus programs, some in conjunction with the Fed. In a letter dated Nov. 19, Treasury Secretary Steven Mnuchin indicated to Jerome Powell the following Federal Reserve programs that will cease functioning on Dec. 31, 2020:

• Program 1: Primary Market Corporate Credit Facility (PMCCF)
• Program 2: Secondary Market Corporate Credit Facility (SMCCF)
• Program 3: Municipal Liquidity Facility (MLF)
• Program 4: Main Street Lending Program (MSLP)
• Program 5: Term Asset-Back Securities Loan Facility (TALF)

Funded via Congress’ CARES Act, these programs give the Fed the power to loan as much as $4.5 trillion to markets.

Naturally, this move is currently opposed by the Fed because it takes away additional tools that can be deployed to support the economy and its underlying financial systems. Treasury Secretary Mnuchin’s actions will return $429 billion from the Fed to Congress to be re-appropriated.

One program that will be lost is the MSLP, which was recently modified to give loans as small as $100,000 per applicant. With no more access by year-end, this will likely impact smaller businesses.

It is noteworthy that the following programs were extended for an additional 90 days after Dec. 31, 2020: the Commercial Paper Funding Facility (CPFF), the Market Mutual Fund Liquidity Facility (MMLF), the Primary Dealer Credit Facility (PDCF), and the Paycheck Protection Program Liquidity Facility (PPPLF), used to shore-up money market liquidity. Though, depending on who is the treasury secretary in 2021, there might be a reconsideration of any or all of these programs.

How Businesses Can Adapt, Grow During COVID-19

In order to survive – and even thrive – during these unprecedented times, small businesses have had to find new ways to make money. The UPS Store’s Small Biz Buzz survey found that 41 percent of small businesses in the United States took steps to modify their businesses in hopes of survival. Fifteen percent provided customers with curbside delivery options, 28 percent moved to online sales as their primary source of sales, and 65 percent made a concerted effort to grow their e-commerce capabilities.

More than 50 percent of those polled by a U.S. Census Bureau Small Business Pulse Survey said it will be at least half a year before pre-COVID levels of business come back. Looking at overall economic recovery, we could be waiting five years or more for things to return to where they were before. When it comes to small businesses, it might take even more time; however, businesses that adapt will be more likely to succeed.

In order to increase the chances of the pivot being successful, Harvard Business Review recommends doing so based on the newly created conditions of the crisis. In the case of the pandemic, it has created more telecommuting, disrupted supply chains, and required everyone to socially distance for work, leisure, and daily tasks. In light of these circumstances, there are three factors for a pivot to be successful.

Social Distancing Opportunities

With the pandemic demanding less contact, chiefly through social distancing, businesses must find ways to work around the new circumstances. One example is dating websites, many of which have added a video dating option for users. Meanwhile grocery stores have limited in-store customers, required workers and customers to wear masks, and added more and wider delivery areas for groceries and other products.

Building on Original Business Concept

The second recommendation by HBR is that businesses examine how additional and different services or products complement their original business concept.

Let’s consider Airbnb; when travel and resulting bookings collapsed, the platform’s hosts received financial assistance that helped facilitate guest relations virtually. In a shift from its non-hotel lodging option via homeowners and apartment dwellers offering their abode for rent, Airbnb moved to providing hosts with the ability to hold online events, such as cooking classes, art therapy, virtual tours, or other activities.

Looking to the future and building on the opportunity for growth, tourists could learn about new places to travel and things to do and learn while visiting the new destination. 

Adapting to Change by Adding Value

The final ingredient of a successful pivot, according to HBR, is that the move demonstrates how well a company can adapt, work through problems, and adjust to market forces while proving profitable and resonating as a value in the consumer’s view.

Before the lockdown orders, Spotify placed a sizeable portion of its business model on having primarily free customers stream music on personal devices. Spotify would benefit in two ways – they wouldn’t have to send out Spotify-specific devices and they could rely on receiving income from advertisements that non-paying users would listen to in exchange for a free Spotify membership. However, when the pandemic hit, advertisers on Spotify cut their marketing budgets, making this business model difficult for Spotify to sustain.

Spotify’s pivot was to offer podcasts for users from music artists, talk show hosts, celebrities, etc. By offering premium subscriptions for its podcasts, along with curated, niche programming, Spotify gave customers more control and a better value over previous media offerings.

While the pandemic doesn’t necessarily mean a “going out of business sign” for companies, it could spell the end of the road for those that don’t adapt to the new economy.

Sources

https://www.uschamber.com/co/start/strategy/metlife-us-chamber-small-business-index-covid-19

https://hbr.org/2020/07/how-businesses-have-successfully-pivoted-during-the-pandemic

https://www.uschamber.com/co/start/strategy/pivoting-your-business-to-survive-pandemic

Last Minute Financial Moves for Year’s End

There are certain year-end financial transactions that must clear by Dec. 31 to be reported on the 2020 tax return. It is important to take a good look at your financial portfolio in light of the plethora of unusual events that occurred this year. Now is a good time to determine if you have fallen off track and whether you can reposition your portfolio for better opportunities in 2021.

Investment Portfolio

Despite the dramatic stock market drop that accompanied the outbreak of COVID-19, markets have recovered remarkably well. This means the traditional strategy of harvesting gains and losses at year-end could be appropriate for many investors. When your capital losses are more than your capital gains for the year, you can claim up to $3,000 to reduce your taxable income and even carry over remainder losses on next year’s tax return.

Harvesting is also a good way to rebalance your asset allocation strategy so you are well-positioned to meet long-term goals starting in the New Year. If you are interested in selling winners and losers to mitigate your 2020 tax liability, make sure these transactions are fully completed by Dec. 31.

Tip: Some investors might be tempted to sell shares for a loss and then buy back into that position. However, take pains to avoid running afoul of the “wash rule,” which is when an investor purchases a “substantially identical” security within 30 days of a lost sale. Doing so diminishes the losses you can claim on your taxes, even if you buy it back in January. This can also occur inadvertently through automatic dividend and capital gains reinvestment purchases, so monitor your holdings and make sure there’s a 30-day lag between sale and reinvestment.

Retirement Accounts

For workers who invest in an employer-sponsored 401(k) plan, you have until the end of the year to defer up to $19,500 ($26,000 if you’re age 50 or older) from your paycheck. If you would like to stash away more money, the combined annual limit for traditional and Roth IRAs is $6,000 ($7,000 for age 50+) for 2020. Note, however, that contributions for these accounts may continue to be made up until you file your 2020 tax return.

Tip: Given the potential for higher taxes under the new administration, it might be wise to max out after-tax Roth IRA contributions while taxes are low. When taxes are higher, traditional IRAs and 401(k)s tend to be more valuable because tax-deferred contributions help reduce current income. You also might want to convert a portion of traditional IRA funds to a Roth this year to take advantage of the lower tax environment. Convert only a strategic portion to avoid tipping your current income into a higher tax bracket.

Retirement Plan Withdrawals

You have until year-end to withdraw up to $100,000 without penalty from a retirement plan, if you have been directly affected by COVID-19 this year. Note, too, that subsequent income taxes on this withdrawal can either be spread out over a three-year period or avoided entirely if you re-contribute the funds over the next three years.

Tip: Legislation passed early in the year permits retirees to skip taking required minimum distributions in 2020. However, because the stock market has recovered nicely, and in light of higher taxes in the future, it might be a good idea to go ahead and take this distribution before year-end.

Education Savings Accounts

If your college student received a tuition refund this year because the class experience moved online, be aware that any refunds of College Savings 529 plans must be deposited back into that account. Otherwise, that money is considered a distribution for non-qualified expenses. Make that deposit back into the 529 account by year-end to avoid any taxes or penalties.

Tip: Parents and grandparents can reduce their estates by making a year-end gift to a student’s 529 plan. You may gift up to $15,000 ($30,000 for married couples) per beneficiary without incurring gift taxes or affecting your lifetime gift tax exemption ($11.58 million).