Archives for December 2020

Details of the New Stimulus Act

December 30, 2020 by Michels & Hanley CPAs LLP Leave a Comment

12.29.20 | Client Alert

President Trump has signed the $900 billion Consolidated Appropriations Act, 2021 into law, bringing expanded COVID-19 relief to businesses, nonprofits and individual taxpayers.

As we previously wrote about, included in the legislation is the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (“the Act”), which includes another round of Paycheck Protection Program (PPP) loans, makes PPP-funded expenses tax-deductible, temporarily restores the 100% business meal deduction, and extends the employee retention tax credit and other important CARES Act provisions.

New PPP Loans

Of the $325 billion of business relief included in the Act, the vast majority ($284 billion) is allocated to more PPP loans for both first-time and repeat borrowers. The Act maintains the forgiveness potential based on the 60% payroll (40% non-payroll) expense requirement of the PPP Flexibility Act, but other key aspects of the program have changed.

The maximum loan amount is reduced to $2 million or 2.5 times monthly payroll costs incurred during the one-year period before the loan is made, or during calendar year 2019 (3.5 times monthly payroll if the entity’s NAICS code is 72).

The eligibility requirements have changed to require:

Fewer than 300 eligible employees, on an affiliated company basis

The SBA determines number of employees in accordance with the CFR Section 121.106, which
allows for all individuals employed on a full-time, part-time, or other basis to be included in the count, including employees obtained from a temporary employee agency, professional employee organization or leasing concern.

To determine the size of a concern, the SBA provides the following guidance:

(1) The average number of employees of the concern is used (including the employees of its domestic and foreign affiliates) based upon numbers of employees for each of the pay periods for the preceding completed 12 calendar months.
(2) Part-time and temporary employees are counted the same as full-time employees.
(3) If a concern has not been in business for 12 months, the average number of employees is used for each of the pay periods during which it has been in business.
(4)(i) The average number of employees of a business concern with affiliates is calculated by adding the average number of employees of the business concern with the average number of
employees of each affiliate. If a concern has acquired an affiliate or been acquired as an affiliate during the applicable period of measurement or before the date on which it self-certified as small, the employees counted in determining size status include the employees of the acquired or acquiring concern. Furthermore, this aggregation applies for the entire period of measurement, not just the period after the affiliation arose.
(ii) The employees of a former affiliate are not counted if affiliation ceased before the date used for determining size. This exclusion of employees of a former affiliate applies during the entire period of measurement, rather than only for the period after which affiliation ceased. However, if a concern has sold a segregable division to another business concern during the applicable period of measurement or before the date on which it self-certified as small, the employees used in determining size status will continue to include the employees of the division that was sold.

Revenue decrease of at least 25%

For purposes of the PPP, this revenue decrease must have occurred during one of the first three quarters of 2020, or during Q4 2020 (if applying after January 1, 2021). The decrease is
determined by comparing gross receipts in a quarter to the same quarter in the prior year.

Exclusions

Specifically excluded from applying for this round of PPP loans are: public companies, lobbying entities, entities with China-based ownership and venue operators receiving aid under the venue grant section of the Act.

Existing PPP Loans

The legislation also makes the following improvements that can be retroactively applied to all PPP loans:

• Tax deductibility of all qualified expenses paid with PPP funds is allowed.
• PPP allowable and forgivable expenses are expanded to include operating expenses, property damage costs (caused by acts of civil unrest), supplier costs and worker protection costs (both operating and capital costs).
• Borrowers can now choose any 8- to 24-week period as their loan forgiveness covered period.
• Economic Injury Disaster Loan (EIDL) grants will no longer reduce PPP forgiveness.
• A simplified forgiveness application for PPP loans of less than $150,000 will be limited to borrower certifications.
• Forgiven PPP loan funds will be considered tax-exempt income and will increase owners’ basis in pass-through entities.

In addition to the PPP updates, the bill also modifies or extends other individual and business friendly provisions, including:

• Extends the employee retention tax credit into 2021; increases the credit to 70 percent (from 50 percent) of qualifying wages; and increases the limit on creditable wages to $10,000 per quarter (instead of per year).

• Allows small employers that received PPP loans to use the employee retention tax credit to cover other wages.

• In 2021 and 2022, allows a 100% deduction for the cost of business meals.

• Extends the deadline by which employers who deferred employees’ payroll taxes need to increase their employees’ withholding and pay the taxes owed. The deferred taxes must
now be paid by the end of 2021 (originally due on April 30, 2021).

• Extends CARES Act charitable giving incentives (charitable deductions up to 100% of AGI and $300 above-the-line charity deductions) into 2021.

• Extends retirement plan distribution relief into 2021.

• Makes permanent the IRC Section 179D energy-efficient building deduction.

Michels & Hanley will continue to provide updates on specific areas of this new legislation. If you have any questions, please reach out to our office.

Is Robinhood Violating the Fiduciary Conduct Standard in Massachusetts?

December 29, 2020 by Channelchek Leave a Comment

A complaint against Robinhood has been filed by the state of Massachusetts. The action is based on a new state law that it began to enforce in September. This filing comes in the same week that the self-directed brokerage firm settled a suit with the SEC by paying $65 million. The new action is based on regulations unique to broker-dealers conducting business in Massachusetts, it charges the online broker with “gamification” of its platform.

Back in March, the Massachusetts Securities Division adopted amendments to one of their codes in response to the U.S. Circuit Court which threw out the Department of Labor’s fiduciary rule two years prior. The DOL regulation sought to curb conflicts of interest in financial advice by holding broker-dealers to the highest standard of doing what is in the clients’ best interest, rather than the lesser suitability standard they had been operating under. The amendment to the state’s existing code included language that held the broker-dealer community to a similar standard as wealth managers when providing investment advice.

What’s in the Amended Code?

The regulations cited in the action became effective on March 6, 2020, while enforcement of the regulation began on September 1, 2020. According to the Secretary of State for the Commonwealth of Massachusetts website, the regulations make a broker-dealer or agent subject to a fiduciary duty to clients when providing investment advice, recommending investment strategy, moving assets to an account, or the purchase, sale, or exchange of securities. Commissions are allowed under the current law; however, it requires that a broker-dealer or agent make recommendations and provide investment advice without regard to the financial or any other interest of anyone other than the customer. The fiduciary conduct standard also requires that the broker-dealer or agent must take all reasonably practicable efforts to avoid conflicts of interest and reduce conflicts that cannot reasonably be avoided.

Unsolicited trades, defined as one in which the client initiates the transaction without the idea having first come from the investment professional, have not been subject to the fiduciary conduct standard. The standard applies in connection with recommendations or advice provided by a broker-dealer. Activities of a broker-dealer in connection with unsolicited trades are subject to both state and federal conduct rules.

What’s in the Complaint?

Robinhood has 486,000 brokerage accounts in Massachusetts with total assets of $1.6 billion. The complaint alleges that Robinhood exposed Massachusetts investors to “unnecessary trading risks” by “falling far short of the fiduciary standard” The 24-page complaint from the Office of the Secretary, William Galvin, focuses on the tactics that Robinhood uses to keep investors engaged. The implication is that the self-directed broker-dealer encourages users on the platform through what it calls “gamification.” Examples cited within the complaint include one Robinhood customer with no investment experience that made more than 12,700 trades in just over six months.

Referring to Robinhood’s business practices, Galvin said, “They know that their investors are primarily younger. It’s because they think there are more unsophisticated investors among them — we heard from some of them”. He charged, “They’ve exploited the current situation with the pandemic. They contributed to the frothiness of the market, bringing people in who don’t know much about it. They’re not responsible fiduciaries.”

A Robinhood spokeswoman disputed the allegation, “Those who dismiss new and younger investors, who come from increasingly diverse backgrounds, as unsophisticated or unserious perpetuate the myth that investing is only for the wealthy,” she said. “History is littered with startups criticized by the establishment that are now strong, longstanding businesses.”

Robinhood plans to defend itself.

What it Could Mean for Robinhood?

There are two main charges in the Massachusetts complaint against the broker. First is that Robinhood encourages risky trading. The second is that they ignore their own options-approval rules by allowing margin accounts for users of their app with little or no market experience. Proving that they encourage risky trading because of the alleged gamification of the platform may be difficult. The marketing of most retail platforms includes some method of added appeal related to the target demographic. The challenge is in the difficulty of proving that Robinhood encouraged speculation. The second main charge seems to depend on more clear-cut evidence. The complaint alleges about 68% of Massachusetts Robinhood account owners that are approved for margin trading have been identified as having limited or no investment experience. Since margin accounts provide Robinhood with additional order flow and the ability to extend credit for which Robinhood does earn daily interest, they may be in violation. Their own rules on extending credit demonstrate they believe clients should have a minimum level of experience. If it’s accurate that the broker’s questionnaire records indicate 68% of Massachusetts Robinhood margin account owners did not have this experience when they first had margin made available to them, Robinhood’s conduct does not meet the state’s code and Secretary Galvin’s complaint is valid.

On December 8, 2020 Robinhood selected Goldman Sachs to lead preparations for an initial public offering (IPO) which could be valued at more than $20 billion. The Massachusetts complaint, or any fines stemming from it, are not expected to have a material impact on the companies plans or valuation.

Suggested Reading:

Investing and trading Skills

College Scholarships for Esports Gamers

Sources:

Robinhood is Expected to be a Top IPO – Regulatory Actions Show Hurdles

After Courts Kill a Federal Fiduciary Rule, Massachusetts Launches Its Own

Massachusetts Fiduciary Conduct Standard for Broker-Dealers and Agents

Ahead of an IPO Robinhood Agrees to Pay $65MM to Settle Charges

SEC Charges Robinhood for Misleading Investors

Robinhood Accused of Gamification in Massachusetts

Massachusetts Regulators File Complaint Against Robinhood

The Fiduciary Rule Is Dead. What’s an Investor to Do Now?

After 2020 Stock Market Outperformance, What Are the Odds for 2021?

December 29, 2020 by Channelchek Leave a Comment

With the S&P 500 climbing to a new all-time closing high of 3,735.36, what are the stock market valuation indicators tell us? Although 2020 has been an outlier year in many ways, the S&P 500 is up over 70% from its March 23^rd pandemic lows, and year-to-date, the index has risen 15.4%. Notably, the YTD rise, if it were to hold through the end of the year, would rank 2020 as the 46^th best performing annualized return for the S&P 500 over the last 95 years. Not a bad accomplishment for such a turbulent year. The 2020 return is nearly double the average annual return of the S&P 500 since the 500 stock index was adopted in 1957.

Economists view the stock market as forward-looking, a leading indicator foretelling future economic pace. So, after the 2020 outperformance, what might 2021 look like?

What are the Odds?

The bad news is that the vast majority of historical valuation measures show a significantly overvalued market. For example, the Bull-to-Bear ratio is 3.7, well above the 1.0 neutral territory. The Consumer Comfort Index is 59.5, near the highest level seen since the late 1990s (what happened in late 1999/early 2000 brought pain to the stock market). The S&P 500 Price/Earnings-to-Growth (PEG) ratio of 1.9 is at its highest level since 1985. Tobin’s Q (or “Q Ratio” compares an asset’s market value to replacement value) for non-financials. Currently, at an adjusted 3.3, it is at its highest level since 1952.

The forward P/E ratios for the S&P 500 (large-cap) and the S&P 400 (mid-cap) are at their highest levels since 2006, while the S&P 600 (small cap) forward P/E is near its highest level since 2006. The Shiller P/E is 33.8x, versus a 20-year average of 25.6x and approaching its 20-year high of 37.3. The S&P 500 P/S ratio of 2.68x is at its highest since 2000 and well above the 1.50x median. Finally, market capitalization to GDP, often termed The Buffett Indicator, shows an overvalued market. The market cap of the Wilshire 5000 to GDP is 1.83, well above the 0.8 median average and the highest level since 1970. Looking at both the S&P 500 to GDP and Dow to GDP ratios, these are both at 70-year highs.

How is the Economy?

While above-normal valuations often go hand in hand with above-average economic growth, that does not appear to be the case this time. According to the U.S. Bureau of Labor Statistics, GDP is projected to grow just 2.6% in both 2021 and 2022. While this is better than the 2.1% average from 2010 through 2019, it falls far short of the 3-4% annual GDP growth experienced over the previous 40 years. Unemployment numbers, while well down from the pandemic highs, seemed to have stalled in the mid-6% range, nearly double the pre-pandemic numbers. While a COVID vaccine should help the economy recover to a more normalized state, how fast and far such an impact will have is unknown.

Bright Spots

On a more positive note: one should take into account the outsized influence of the FAANGM stocks on the P/E multiple. FAANGM stands for Facebook, Amazon, Apple, Netflix, Google, and Microsoft. These six stocks now account for nearly 25% of the S&P 500’s entire market capitalization. Since 2013, these six stocks are up 567.5%, compared to just 103.3% for the other 494 stocks. As mentioned previously, the S&P 500 forward P/E is 22.1x. The forward P/E for the FAANGM stocks is 40.1x. If you remove the FAANGM stocks, the adjusted forward P/E for the remaining 494 stocks falls to 19.3x, which is close to the modern era average CAPE P/E of 19.6x, suggesting, at least from an earnings perspective, the market is not as overvalued as it appears. In addition, according to Yardeni Research, the Fed’s Stock Market Valuation model shows the S&P 500 forward P/E at 21.7x, compared to a 114.9x P/E for bonds, implying, stocks remain the superior investment choice to fixed income.

Suggested Reading:

Will Robinhood be Fined on Charges of Gamification

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Vaccination In The Workplace

December 23, 2020 by Jules Halpern Leave a Comment

December 22nd, 2020 | By Jules Halpern Associates | ADA, COVID-19, EEOC, Employer Liability, Employer Policies, GINA, Title VII

Many Americans have been eagerly anticipating the arrival of the COVID-19 vaccine since the pandemic began. Employers must strike the balance of maintaining workplace health and safety with considering the individual circumstances of various employees. Below we cover crucial information for employers when it comes to vaccination requirements in light of the COVID-19 vaccine.

Updated EEOC Guidance

On December 16^th, the Equal Employment Opportunity Commission released guidance for employers regarding COVID-19 vaccines. It indicates that COVID-19 vaccines are currently available for use by Emergency Use Authorization, as opposed to typical FDA authorization processes. Employers need to use caution and realize what sort of inquiries can be construed as disability-related. For example: asking employees to show proof of COVID-19 vaccination is not a disability-related question. However, asking pre-vaccination screening questions is likely to reveal information about a disability and as such, employers must be prepared to show that the questions are begin asked out of a business necessity and are job-related.

The guidance also indicates that employers asking for proof of vaccination does not implicate Title VII of the Gene Information Discrimination Act (GINA), which prohibits employment discrimination based on genetic information. However, pre-vaccination screening questions, if the vaccine is administered through the employer, may implicate GINA if the questions relate to genetic information. As such, if the questions implicate GINA, it would be recommended that employers request proof of vaccination from employees instead of the employer administering the vaccination. Furthermore, administration of the COVID-19 vaccine by the employer or a third party hired by the employer does not constitute a “medical examination” under the ADA because it is not seeking information about an employee’s physical or mental health.

Vaccination as a Requirement

The EEOC guidance indicates that employers can require COVID-19 vaccinations. Under the Americans with Disabilities Act (ADA), employers can instill a qualification standard which among other factors, includes “a requirement that an employee not be a “direct threat” to the health or safety of other people at the organization. Lack of vaccination may be construed as a direct threat. However, requiring the coronavirus vaccine would still be subject to exemptions for medical and religious reasons, as all other vaccines are.

The EEOC has published guidance, titled Pandemic Preparedness in the Workplace and the Americans with Disabilities Act, for employers in the event of a pandemic. The publication has been updated throughout 2020 to reflect information regarding COVID-19. It indicates that organizations can require vaccination but that exceptions need to exist in the event of medical or religious objections, as per the Americans with Disabilities Act and Title VII of the Civil Rights Act. The EEOC guidance released on December 16^th also iterates this, and indicates that employers need to work with individuals seeking exemptions in order to determine if reasonable accommodations are possible.

EEOC’s Stance May Become Stronger

Historically, the EEOC has not directed employers to mandate that employees receive vaccines, instead promoting a policy of encouragement. In the unlikely event that receiving a vaccine inflicts harm on an employee, organizations could face liability. Because of the high risk of harm that COVID-19 has proven to present to the community at large, it is possible that the EEOC may take a stronger position in the coming months. The EEOC may begin to recommend organizations institute a policy of vaccination requirement, subject to medical and religious exemptions, as opposed to a policy of vaccination encouragement.

Encouragement versus requirement policies may also vary based on industry. For example: healthcare facilities or employers that work with populations at higher risk for severe illness due to COVID-19 will be more likely to require vaccination as opposed to an employer that is operating with limited personal contact.

Cost of the Vaccine

The federal government is subsidizing the cost of the vaccine at this time, although the organization providing the vaccine can charge administration fees. Vaccine recipients can have this fee reimbursed by their insurance company or by funding provided through the U.S. Department of Health and Human Services if uninsured.

Ultimately, the majority of the population – between seventy-five and eighty-five percent- must be inoculated in order to achieve a level of societal protection, as iterated by Dr. Anthony Fauci, Director of the National Institute of Allergy and Infectious Diseases. Because the COVID-19 vaccine is so new, this is a rapidly evolving situation, with new information emerging daily. If you have questions regarding your specific circumstances, please reach out so that we may assist you.

$900 Billion Covid Relief Deal Reached Including Deductibility of PPP expenses

December 21, 2020 by Michels & Hanley CPAs LLP Leave a Comment

Michels & Hanley CPAs, LLP COVID-19 –

12.21.20 | Client Alert

Congress leaders announced Sunday night that they reached a deal on a $900 billion COVID-19 relief package.

One of the biggest questions from small business owners who received PPP funds has (or is expected to) been answered. The provision, part of the year-end coronavirus relief bill expected to soon clear Congress, would ensure that PPP recipients can deduct the payroll costs and other expenses covered by forgiven loans. The move would reverse a Treasury Department ruling that denied the deductions.

The deal also includes a new round of direct payments to struggling Americans, as well as more money for businesses. The agreement includes stimulus checks of up to $600 per person for individuals earning $75,000 per year and $600 for their children – the same requirements as the first round of stimulus checks.

Here are some key provisions that will be included as part of the agreement, according to a release Sunday evening from House and Senate leaders:

Aid for struggling small businesses, including more than $284 billion for forgivable Paycheck Protection Program loans and $15 billion “in dedicated funding for live venues, independent movie theaters, and cultural institutions.
$300 per week for enhanced unemployment insurance benefit.
$25 billion for rental assistance and an eviction moratorium extension
$82 billion for education providers like schools and colleges, including aid to help reopen classrooms safely.
$10 billion to help with childcare assistance.
$13 billion in increased Supplemental Nutrition Assistance Program and child nutrition benefits.
$7 billion to bolster broadband access to help Americans connect remotely during the pandemic
Funding totaling in the billions of dollars to support coronavirus vaccine distribution, testing and contract tracing efforts and health care workers.
A tax credit “to support employers offering paid sick leave”

Lawmakers are expected to vote on the package beginning today, Monday, December 21st