Archives for January 2021

Tax Credit Expanded for More Business Relief

January 20, 2021 by Michels & Hanley CPAs LLP Leave a Comment

Employee Retention Tax Credit Expanded for More Business Relief

1.13.21 | Client Alert

The Employee Retention Credit (ERC), which was originally included in the CARES Act
(original law) passed in March 2020, provided a refundable payroll tax credit of 50% for up to
$10,000 in qualifying wages per employee paid by an eligible employer whose business had
been financially impacted by COVID-19. However, this credit was not available to businesses
that had borrowed under the Paycheck Protection Program (PPP).

The Consolidated Appropriations Act (new law), signed into law on December 27, 2020, makes the following significant changes pertaining to the ERC:

The new law makes the original ERC available to the borrowers of the PPP loan retroactively to March 13, 2020. However, there are no changes to the eligibility requirements or computational aspects of the credit for qualified wages paid after March 12,2020 and before January 1, 2021. The Act also extends and modifies the eligibility requirements and computational aspects of the credit for qualified wages paid from January 1, 2021 through June 30, 2021, at which time this credit is set to expire.

The outline below highlights the contrast between the original and the new law and explains how your business can take advantage of this valuable tax incentive for 2020 and 2021.

Covered Period

Original law – Applicable to qualified wages paid after March 12, 2020 and before Jan 1, 2021.

New law – Applicable to qualified wages paid after March 12, 2020 and before July 1, 2021
with some changes to the eligibility and credit computation to wages paid from January 1, 2021 to June 30, 2021 only

Eligibility Requirements

Original law – Under the CARES Act, the ERC is available only if the business falls into one of the following two categories:

The employer’s business was fully or partially suspended by government order due to COVID-19 during the calendar quarter, in which case only the wages paid during the full or partial shutdown period qualify for the credit;

The employer’s gross receipts dropped below 50% of the comparable quarter in 2019. Once the employer’s gross receipts rise above 80% of a comparable quarter in 2019, they no longer qualify for the credit after the end of that quarter.

New law – Under the Consolidated Appropriations Act, the extended ERC is available only if the businesses fall into one of the following two categories during the first two quarters of 2021:

The employer’s gross receipts dropped below 80% of the comparable quarter in 2019. Alternatively, businesses have the option to meet this requirement only for 2021 by comparing the immediately preceding quarter to the same quarter in 2019.

Qualified Wages and Number of Employees Threshold

For purposes of calculating the ERC, qualified wages are based on the monthly average number of employees in 2019.

Original law – Under the original law, if the employer had 100 or fewer “full time equivalent” (FTE) employees on average in 2019, the credit is based on wages paid to all employees, regardless of whether they worked or not. If the employees were paid for full-time work, the employer still receives the credit.

For employers with more than 100 FTE employees on average in 2019, the original law only allowed the credit for wages paid to employees who did not work during the calendar quarter.

New law – Effective January 1, 2021, the new law increases the FTE threshold to 500 employees and allows employers with 500 or fewer FTE employees to The ERC for employers with more than 500 FTE employees will continue to be limited to wages
paid to employees who did not work during the first two quarters of 2021.claim the credit based on wages paid to all employees, whether they provided services or not.

Credit Amount for Qualified Wages Paid after March 12,2020 and before January 1, 2021

Original law – The original law set the maximum amount of wages that can qualify for the credit at $10,000 per employee (including qualified health plan costs) for wages paid after March 12,2020 and before January 1, 2021. The credit is 50% of such qualified wages; therefore, an eligible employer can claim up to $5,000 per employee in payroll tax credits for entire 2020 covered period.

New law – The new law does not change any computational or eligibility aspects of the credit for wages paid in 2020 but simply opens the doors for borrowers of PPP loans to look back at 2020 and determine if they have any opportunity to claim the ERC. It is important to remember, however, that an employer cannot claim the ERC for ages paid with forgiven PPP funds, as it would amount to double dipping, which is prohibited.

Credit Amount for qualified wages paid from January 1, 2021 to June 30, 2021

Under the new law, the maximum amount of wages that can qualify for the credit is $10,000 per employee per quarter (including allocable group healthcare costs). The credit is increased from 50% to 70% of such qualified wages, and accordingly an eligible employer can claim up to a maximum of $7,000 per employee in payroll tax credit per quarter – for a total of $14,000 per employee through the first two quarters of 2021. Advance Credit Payments.

Effective January 1, 2021, employers with 500 or fewer employees can claim an advance payment of the credit of up to 70% of average quarterly wages in the corresponding quarter in 2019. Any excess advance received will have to be reconciled to the actual and repaid back to the Treasury.

Key Takeaways

As the new law opens the doors for PPP loan borrowers to look back at 2020; businesses that did not (or could not) take advantage of the ERC in 2020 should review their payroll costs for 2020 and determine any qualified wages under the original law that are in excess of the wages included in PPP loan forgiveness.Likewise, affiliated businesses that previously could not claim the ERC due to a PPP loan obtained by another affiliate under common control can now consider claiming the credit if they otherwise meet all eligibility requirements.

It appears that the healthcare costs paid for furloughed employees would qualify for this credit
even though there are no accompanying wages associated with such healthcare costs.

Employers can also consider paying out bonuses during the first two quarters of 2021 to maximize the credit allowed under the new law’s maximum credit limit.

Unlike year-end tax credits, the ERC can be taken immediately and bring timely financial relief to your business when it needs it the most. For more information on determining your eligibility, calculating maximum credit and claiming the ERC for your business, contact your Michels & Hanley service partner.

Where Could Investors Profit When the Economy Fully Opens?

January 12, 2021 by Channelchek Leave a Comment

Is the Post-Pandemic Recovery Move into Small-Cap Stocks?

The Russell 1000 Index, a subset of the Russell 3000 Index, represents the top 1000 companies by market capitalization in the United States. The public companies within the measure add about 92% of the total market capitalization of the full 3000 largest corporations. The market cap of the Russell 2000 or the remaining small-cap companies is approximately 8%. The Russell 1000 large-cap index is not quoted as often as the S&P 500; however, the Russell 2000 is usually the favored benchmark when referring to small-cap stock performance.

Despite the S&P 500 garnering much of the media attention, in 2020 the Russell 1000 exceeded the more widely quoted large-cap index’s performance. The S&P only returned 16% while the Russell 1000 returned 21%, or 5% more to investors. After the pandemic-altered economy, large-cap stocks received most of the attention, seeming to rise almost daily beginning in late March. But small-cap stocks also had fantastic performance in the final measure of the up, down, then up again year. With a 20% return, they only trailed the high performing Russell 1000 large-caps by 1%. A large portion of this performance was achieved beginning in early September. This trend may be important to watch as we look for follow-through buying in 2021.

The almost equal performances of the Russell 1000 and Russell 2000 in 2020 (up 21% and 20%, respectively) doesn’t tell the full story of the double-digit swings in leadership between the two indexes as the economic cards were being reshuffled in response to COVID-19.

Equity Market Returns Large vs. Small and Full Year Vs. Fourth Quarter 2020

US Small-Caps Experience Late Year Surge After Lagging Most of 2020

A weak correlation existed between large and small stocks. Much of the difference during late 2020 is attributed to the market sentiment regarding the post-pandemic outlook for a US recovery. These sentiment shifts are reflected in the chart below. It dissects both the Russell 2000 and Russell 1000 index’s full-year performance into five phases. Each seems to represent a pivot point and reaction to a revised outlook.

After significantly lagging behind its large-cap brethren during both the March run-for-cover sell-off and the summer invest-your-check lockdown rally, the Russell 2000 has been a leader since early September. The index rocketed in Q4, significantly eclipsing the Russell 1000. The reported change in sentiment came as positive signs in vaccine testing and generous monetary and fiscal support made headlines. The merger and acquisition activity spike toward the end of the year also helped smaller stocks, which are often M&A targets.

Five distinct phases of 2020 performance (% change)

Source: FTSE Russell. Data as of December 31, 2020. Past performance is no guarantee of future results.

Does the Russell 2000 Have a Cyclical Advantage?

The US small-cap rally may have also enjoyed a tailwind from the “broadening of overall risk” rally in Q4, away from the high-flying tech outperformers in the Russell 1000 and into the stocks viewed as more sensitive to the economic cycle. These include energy and financials, which are 18% of the small-cap index, compared to 12% in the large-cap. There is also a heavy weighting in the Russell 2000 toward Life Sciences and Healthcare. These sectors outperformed by approximately 5%.

The difference in composition is evident in the following chart of the top 10 industry contributors to each of the two indices’ 2020 performance.

Top 10 industry contributors to returns (% of total)

Source: FTSE Russell. Data as of December 31, 2020. Past performance is no guarantee of future results.

Take-Away

Since early September, the upward comparative performance of the Russell 2000 is largely a result of the ongoing rotation away from defensive plays into other sectors of the economy. The weakening US dollar may also play a part as U.S. goods become more competitive with overseas producers.

Though uncertainty is always the rule as far as investment markets are concerned, the late-year trend has remained intact during the first week of 2021 and is well worth keeping an eye on.

Sources:

Investopedia Russell 1000

FTSE Russell Financial Data

Yahoo Finance (S&P) Data

How Good are Experts at Predicting the Market?

January 7, 2021 by Channelchek Leave a Comment

Last Year’s Market Predictions – What was the Final Batting Average?

Here’s a look back to see how the experts’ projections stood up in the topsy turvy year of 2020. We unearthed a December 19, 2019 article on Yahoo by Emily McCormick that highlighted the 2020 predictions of 23 Wall Street strategists. Each provided a target for the S&P 500 for the year ending 2020, along with additional commentary. The majority of the reports were issued in the first two weeks of December 2019. The data and comments we are citing come directly from that article.

What Actually Occurred

Before we get into the observations, we would note the S&P 500 closed at 3,230.78 on December 31, 2019. It closed higher at 3,756.07 on December 31, 2020. That’s a 16.2% annual return. Obviously, that return masks a wild intra-year ride, as the S&P 500 bottomed out on March 23 at 2,191 (intra-day) and closed the day at 2,237.40. For those investors with perfect timing, the S&P 500 rose 71.6% from its March 23 lows to the end of 2020.

Forecasts

In mid-December 2019, the average of the 23 estimates for the 2020 closing S&P 500 index was 3,332, off by nearly 13% relative to what the actual closing level was in 2020. Obviously, COVID and all its implications were not factored into the prognosticators’ forecasts. The range of forecasts went from 3,000, implying a down year in 2020, to as high as 3,600, which was still more than 4% below the S&P 500’s actual performance. The 3,600 prediction was a true outlier as the next closest estimate was 3,450. If we looked at a distribution of the forecasts, nine of the 23 were below the 3,332 average.

So, in the year of wild market swings, impacted by a 100-year pandemic, the experts were clearly off by a significant factor.

There were recurring themes within the commentary from the strategists as to what could impact the stock market in 2020. As one would expect, the election, China/U.S. relations, especially as related to trade, and an accommodative Federal Reserve were mentioned prominently by most strategists.

Forecasts vs. Actual

But some of the other predictions did not play-out as well. For example, in assembling their forecast, most of the strategists predicted higher earnings for the S&P 500. In fact, many of the projections for S&P 500 earnings were in the $165-$175 range; when fully reported, earnings are actually expected to have dropped year-over-year to the $135 level from $163 in 2019.

Some strategists favored non-U.S. markets, predicting better returns overseas. But according to Yardeni Research, the MSCI Share price index for the U.S. was up 19.2% in 2020, well above the All Country Index of 14.3%. And in fact, the U.S. market outperformed each of the five other indexes: European Market, Japan, U.K., and Emerging Markets. To be fair, the Asian Emerging Market significantly outperformed the U.S., but the overall Emerging Markets average was held back by poor performance in Latin America.

Another prediction raised was a move from Growth stocks to Value stocks. This switch does not appear to have happened as much of the upswing in the Index was driven by the growth-oriented FAANGM stocks during much of the year.

One interesting prediction that seems to have come true was by Julian Emanuel of BTIG, who stated that with “zero-fee online trading, 2020 could be the year the public falls in love with stocks again.” The rise of Robinhood seems to agree with this statement.

Take-Away

It is often said, with good reason, that it is easier to predict the stock market when given a longer time horizon, perhaps even ten years or longer. The reason is the smoothing that the impact of time and average growth has on the outlier years. Predicting what will happen tomorrow involves so many unknown influences that “experts” are befuddled by the exercise daily.

The predictions made in 2019 concerning the earnings of the S&P 500 were off in terms of direction (they were down, not up). This would cause one to expect lower stock prices than predicted. Obvious this didn’t happen either. While knowledge and understanding of what market strategist predictions are is a useful guide to our own risk/reward assessments., it’s helpful to remember as we enter the new year and new sets of market predictions that the stock market is like a talented major league pitcher – they’re able to get even the most gifted hitters out more often than not. Yet, we can still improve our own skills by observing these pitchers play.

Sources:

Emily McCormick/Yahoo Finance 12/19 Article