SBA Updates to the Paycheck Protection Program Loan Guidance

SBA Updates to the Paycheck Protection Program Loan Guidance

 

LUTZ BUSINESS INSIGHTS

 

SBA Updates to the Paycheck Protection Program Loan Guidance

SBA Updates to the Paycheck Protection Program Loan Guidance

On June 22nd, 2020, the SBA provided updated guidance to the Loan Forgiveness Interim Final Rule. This new PPP guidance contains the following key updates:

Flexible Covered Period Option

A borrower may submit a loan forgiveness application any time on or before the maturity date of the loan – including before the end of the covered period – if the borrower has used all of the loan proceeds for which the borrower is requesting forgiveness. If the borrower applies for forgiveness before the end of the covered period and has reduced any employee’s salaries or wages in excess of 25%, the borrower must account for the excess salary reduction for the full 8-week or 24-week covered period.

S-Corp Owner Retirement Contributions Allowable

S-corporation owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement contributions made on their behalf. However, employer health insurance contributions made on their behalf cannot be separately added because those payments are already included in their employee cash compensation.

FTE Reduction Safe Harbor Date

The date on which borrowers need to have eliminated any reduction in salary/hourly wage greater than 25% or reduction in FTEs (Reduction Safe Harbor dates) has been updated to “anytime on or before December 31st, 2020.”

C-Corp Owner Compensation Clarified

C-corporation owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement and health insurance contributions made on their behalf.

If you have any questions, please contact your Lutz representative or email us at ppploan@lutz.us.

Updated 6/25/2020

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Paycheck Protection Program + FLEXIBILITY ACT OF 2020 – H.R.7010

Paycheck Protection Program + FLEXIBILITY ACT OF 2020 – H.R.7010

 

LUTZ BUSINESS INSIGHTS

 

Paycheck Protection Program + FLEXIBILITY ACT OF 2020 – H.R.7010

Paycheck Protection Program + FLEXIBILITY ACT OF 2020 – H.R.7010

This bill was passed in the House on Thursday, May 28, 2020, and the Senate on Wednesday, June 3, 2020. Once the President signs the bill, it will become law; it is anticipated the President will sign the bill. The below commentary contains Lutz’s interpretation of the updates. Note, the below may change upon the SBA’s implementation of the bill.

CHANGES TO THE PPP IN H.R.7010 

  • PPP Loan Maturity: Updated to 5-year term from a 2year term (needs to be mutually agreed upon with the lender). 
  • Extension of the covered period. The borrower may select: 
    • Earlier of 24 weeks after PPP loan proceeds received or December 31, 2020, OR
    • Currently defined 8week covered period 
  • FTE Reduction and Salary/Hourly Wage Reduction Safe Harbor Date: Updated to December 31, 2020 from June 30, 2020.
  • FTE Reduction Test – Exemption based on employee availability: 
    • For employee reductions made between 2/15/20 – 12/31/20, these reductions will not be considered so long as the Borrower makes a good faith certification and documents that:
      • Borrower is unable to rehire the employees who were employed as of 2/15/20 AND unable to hire similarly qualified employees for those positions by 12/31/20, OR
      • Borrower is unable to return to same level of business activity that such business was operating at before 2/15/20 due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, Director of the Centers for Disease Control and Prevention, or Occupational Safety and Health Administration during the period from 3/1/20 – 12/31/20, related to the maintenance of standards for sanitation, social distancing or any other worker or customer safety requirement related to COVID-19
  • Payroll Requirement: reduced to 60% from 75% (amount of forgiveness that must have been spent on payroll). 
  • Deferral of Principal, Interest and Fees: Any payments are now deferred until forgiveness application is remitted to the lender from the SBA. 
  • If the borrower does not apply for forgiveness before ten months from the last day of the Covered Period, payments of principal, interest and fee will start on the date that is ten months after the last day of the Covered Period. 
  • Deferral of Payroll Taxes: PPP borrowers can delay payroll taxes per Section 2302(a) of the CARES Act.

 

FORGIVENESS CALCULATION UNCERTAINTIES AS A RESULT OF H.R.7010 

As can be expected, changes in the bill resulted in confusion as it relates to existing PPP provisions. Below is a list of the questions that will need to be clarified by the SBA. 

  • For the Salary Reduction Test: Is the average salary still determined based on the average over the entire covered period? Issues could arise for borrowers who temporarily laid employees off but now must average those salaries over the entire 24-week period. 
  • Will more clarity be provided on the FTE exception based on the compliance requirements established by the three named government entities? 
  • Does the 60% payroll requirement rule act as a cliff, in that if 60% of total forgiveness is not made up of payroll, the entire portion is non-forgivable? This would go against prior guidance in the forgiveness application. We do not believe it was intended for this 60% rule to act as a cliff. 
  • Does the Alternative Payroll Covered Period now extend 24 weeks? 
  • If a borrower chooses to maintain an 8-week covered period, will they be subject to the same 12/31/2020 Reduction Safe Harbor date? It would likely be more beneficial for these borrowers to measure at 6/30/2020. 

The next step in this process will be implementation guidance provided by the SBA. The application for forgiveness will likely change considering this new bill, and other key provisions could materially change. 

 

ADDITIONAL LUTZ GUIDANCE AS IT RELATES TO FTE REDUCTION TESTS 

The FTE reduction test was intended to reduce the amount of loan forgiveness afforded to recipients of PPP funds who still furloughed or laid off employees due to COVID-19. The FTE Reduction Safe Harbor test was implemented to relieve borrowers of this reduction in forgiveness if they increase headcount as of 6/30/20 (now 12/31/20) to 2/15/20 levels. 

The FTE Reduction and safe harbor test were well-intended and reasonable on paper. However, issues arose given reductions in employees (FTEs) for nonCOVID-19 reasons. To account for these nonCOVID-19 reductions in FTEs, the SBA added two exceptions when the application for forgiveness was released: 

FTE Reduction Exception #1: 

Any positions for which the borrower made a good-faith, written offer to rehire an employee during the covered period (or APCP), which was rejected by the employee. 

FTE Reduction Exception #2: 

Any employees who during the covered period (or APCP): 

  • Were fired for cause, 
  • Voluntarily resigned, or 
  • Voluntarily requested and received a reduction of their hours. 

Exceptions #1 and #2 apply only if the position in question was not filled by a new employee 

Similarly, bill H.R.7010 passed in both the House and the Senate provided two further “exceptions” for a reduction in FTEs. During the period beginning on 2/15/20 and ending on 12/31/20, the amount of loan forgiveness shall be determined without regard to a proportional reduction in the number of FTEs if a Borrower in good faith is able to document:  

FTE Reduction Exception #3: 

An inability to rehire individuals who were employees of the borrower on 2/15/20; and an inability to hire similarly qualified employees for unfilled positions on or before 12/31/20. 

FTE Reduction Exception #4: 

An inability to return to the same level of business activity as such business was operating at before 2/15/20, due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on 3/1/20, and ending 12/31/20, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19. 

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OMAHA

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Omaha, NE 68154

P: 402.496.8800

HASTINGS

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Hastings, NE 68901

P: 402.462.4154

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Lincoln, NE 68508

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Grand Island, NE 68803

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4 Tips for a Successful Transition Back to the Office

4 Tips for a Successful Transition Back to the Office

 

LUTZ BUSINESS INSIGHTS

 

4 Tips for a Successful Transition Back to the Office

4 TIPS FOR A SUCCESSFUL TRANSITION BACK TO THE OFFICE

ROBERT KEENAN, CHIEF INFORMATION & RISK OFFICER

 

As the economy slowly reopens, remote workers are beginning to return to the office. Howeverbefore your staff return to the workplace, it’s imperative that companies develop and document a detailed plan and list of procedures to ensure everyone remains safe and healthy. 

This guideline has been prepared using information gathered from federal, state and local governments and medical authorities. While this may not cover every situation that could arise, it does require companies to think about and preparfor instances that may not have been considered in the past. Here are four areas that you should have already been and/or should start doing immediately: 

1. COVID-19 TEAM ASSESSMENT  

If your business has not already created a COVID-19 team, you should do so immediately. This group should be comprised of key members needed to make decisions to ensure concerns from every angle are considered. These key members should serve as the spokesperson/messenger for the company/office. This team likely has already notified vendors, developed a plan for postal services, and documenting COVID-19 related messages from employeesSome items the COVID-19 taskforce should review before allowing employees to return include: 

  • Risk: Engage with risk management personnel to gauge the company’s readiness to return to the office. 
  • Insurance: Work with insurers to identify potential risks for returning to work.  
  • Legal: Work with legal counsel to ensure that the actions that are being taken by the COVID-19 return-to-work team are sound and do not violate any employee rights. 
  • Employee Guide: Develop an overview of what to expect when returning employees arrive back in the office. This guide should include:    
    • New entrance protocols for employees and visitors, 
    • A list of supplies that will and will not be available/provided (i.e., food, drinks, utensils, glassware, cups, etc.), 
    • Instructions on bringing equipment (laptops, chairs, etc.) back into the workplace and sanitization requirements, 
    • Changes to the work environment including room availability, relocation of desks, etc., 
    • Modifications to internal and external meeting protocols, hosting of client events, and visitor access. 

Having a team in place to assess and communicate on topics specific to COVID-19 will help your company filter and sort information and requests more efficiently. 

2. PREPARE YOUR OFFICE 

Naturally, you will need to prepare your office for the return of staff members. To ensure everything is ready and in working order, the following tips can be useful: 

OBTAIN A DETAILED FLOOR PLAN/LAYOUT OF YOUR OFFICE 

  • Highlight high traffic areas & exits. 
  • Designate traffic directions to ensure low interaction between staff. 
  • Map out desk/cubes, offices, conference rooms, etc. that adhere to the social distancing guidelines (6 feet apart). 

DESIGN A PHASED EMPLOYEE RETURN PLAN 

Based on the different regulations for each state, and due to the universal social distancing regulations, not all employees will be able to return to the office at the same time. It is recommended that you use a phased approach – taking into account the employee’s desire to return to the office as well as the ability (physically) to bring employees back into the officeIt is recommended that at least a threephase plan is used. The time between phases will depend on the success of the previous phase and adjusting/correcting for any unforeseen problems. Phases could be spaced out with 2-4 weeks in between. 

  • Work with your HR team to determine who will return in which phase. Each company will need to determine the best way to coordinate who/how many people can come back in each phase.  
  • Coordinate with your IT department to get returners set back up in the office so the process goes as smooth as possible. 
  • Know that there may be some people who will be comfortable and productive working remotely going forward.  
  • Plan to have shared/routing office space for those who will not need to return full-time.  

ENFORCE DISTANCING RULES, LIMIT CONTACT, AND INCREASE SANITARY MEASURES 

The current regulations to reduce the risk of spread for COVID-19 is geared heavily toward distancing, cleanliness, and reduced personal contact.  To continue these practices in a professional office environment, the following measures should be applied: 

  • Continue to use virtual forms of communication when possible such as Skype, Zoom, Microsoft Teams, Slack, etc. If employees do need to meet, and their desktop does not have video or sound capabilities, have them try downloading one of the mentioned apps to their phone and use that to communicate. (NOTE: any of these suggestions should be cleared with the Risk and IT department to ensure they are secure and safe tools to use.)  
  • During the 1st and 2nd phase consider disallowing non-employees or clients in the office. 
  • Limit access to restrooms, kitchens, and copy rooms to a new socially distant norm.  
  • Temporarily close areas where employees congregate (lounges, break rooms) if possible. 
  • Limit the elevator usage. 
  • Increase nightly/weekend cleaning routines. 
  • Make sure cleaners are properly trained on the disinfecting guidelines. 
  • Determine areas that require thorough cleaning due to heavy usage, such as training rooms, conference rooms, break areas and restrooms. 
  • Although your company may not require them, offer face-masks for anyone who would like one or encourage them to use their own. 
  • Have hand sanitizers all throughout the building(s). 
  • Provide sterile wipes for people to wipe down their own surfaces. 
  • Place signage around the office to encourage and promote clean habits. 

3. PREPARE YOUR EMPLOYEES 

It is now time to prepare your employees for their return to work. Some will be eager and others potentially nervous, so remember to give clear and nonnegotiable direction to help ease any tensions or stress that the transition may cause 

COMMUNICATE TIMELINESS AND EXPECTATIONS 

It’s important to keep your employees updated.  Here are a few items that should be conveyed to your staff: 

  • Provide an estimated timeline on the phased approach back into the office, and detail as best as possible what that process will look like. 
  • We suggest that the COVID team, in conjunction with the HR team, prepare a confidential questionnaire for each employee to complete for the sole purpose of ensuring that the employee is ready to return to work, identifying the appropriate phase the employee should return, and to address any individual concerns an employee might have about returning to work. Questions you could ask include: 
  • To the best of your knowledge, have you been exposed and/or been around another person who has tested positive for COVID-19 in the last month? 
  • Are you experiencing any symptoms associated with COVID – 19? If yes, please describe.  
  • Have you recently traveled outside the State of ___? If yes, describe. 
  • Are there any unique circumstances the COVID Team needs to be aware of related to you returning to work in the office? If yes, please describe.  
  • Is it your desire to return to working at the office building as soon as possible versus continuing to temporarily work remotely? If so, why?  
  • Please list any company equipment you took home with you to work remotely. 

CHANGE  

While the workplace design, policies, and safety protocols are critical pieces of the puzzle, they do not touch on perhaps the most important aspect of the return to work—the readiness of the workforce physically, emotionally, and psychologically. Developing a plan to mitigate employee fears and concerns should be a top priority. 

To help employees, organizations must work to ensure their employees understand what to expect upon their return. Some employees may expect nothing to change, while others will assume everything will be different. Preparing employees and reminding them that these changes are designed to help keep them safe will ease their anxiety. 

4. CREATE A PLAN TO TRANSITION TECHNOLOGY 

As we migrate back to the office, we face many new challenges from an IT standpoint. From reconnecting office equipment to more changes in server functionality, having a technology plan in place to alleviate the stress of getting set back up upon their return to the office is imminent. 

FOR EMPLOYEES 

  • STOP USING VPN: Were you using a VPN connection while working from home? It is no longer needed when you are back in the office. You are now plugged in. There is no longer a need to connect this way, as a VPN connects from the outside-in. 
  • REASSEMBLE YOUR WORKSTATIONReassembling your workstation and plugging in the equipment that you took home can be a daunting process. However, the toughest part will be plugging in your data/ethernet cable to the right port on your desktop. This is required so that you can receive remote support, connect to the network, Internet, etc. So, be patient and do your best. Here are a few tips on how to properly connect your cables: 
  • Generally speaking, for data cables, most cubicles/offices have 2 data ports, marked with a # and either a “V” for voice or “D” for data. The # is not important to you, for now. The letters are. Plug your phone ethernet cable in the V, and plug your desktop ethernet cable into the D.  
  • If none of the above is marked, your MSP/IT staff will need to advise.  
  • If you only have one port, check your phone’s underside to see if there are ports to connect both phone and desktop together. Somewhat like this: Data Port > ethernet cable > phone > ethernet cable out of phone > desktop.   

FOR MANAGEMENT 

  • TAKE INVENTORYBuy more laptops, period. Also, budget for extra hardware that was originally needed when this happened, i.e., webcams, monitors, power strips, etc. that were all depleted during this time. It might seem expensive, but having equipment on the shelf, ready for IT or your Managed Service Provider to remotely manage, is a good thing. It will also save your staff hours in lost productivity.  
  • ANALYZE SOFTWARE: Inspect your firewall’s overall performance with your Managed Service Provider or IT staff. Did it suit your needs? Do you need more VPN licenses? Is the firewall licensing, as well as the firmware, up to date?  
  • REINFORCE SAFE ONLINE PRACTICES: Now is a great time to give your staff a reminder on the cybersecurity landscape, i.e., phishing attacks, malicious threats, malware, and online best practices. Do you have a plan in place should your business ever be comprised? It is more important than ever, as hackers recognize the vulnerability with the current state of business. 
  • FULLY TRANSITION TO THE CLOUD: If your business has not already fully transitioned over to the cloud, it may be time to do so. Cloud-based communication and file-sharing applications are making it easier than ever to stay connected. While the recent pandemic forced many small businesses to shift to some cloud-based applications, we have seen a lot of companies fully integrating cloud services going forward. 

IMPLEMENT YOUR PLAN 

Before re-entering the office, there are multiple items that should be reviewed to ensure the safety and readiness of your staff and the company. These items include designating a COVID team to handle all pandemic related matters, preparing your office and employees for the changes ahead, and working with your IT team to properly reconnect all technology systems and equipment.  

Navigating through these uncertain times will be challenging for everyone, as there are many moving parts. So, it’s important to be patient and proactive to ease the transition back into the office. If you have any questions, or you are interested in having our team helping you transition back to the office, contact your Lutz representative or email us at info@lutz.us 

Important Disclosure Information

Please remember that due to various factors, including changing guidance and regulations that are continually being amended and/or applicable laws, the content may no longer be the most to up to date. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized risk or compliance advice from Lutz. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to their firm’s individual situation, he/she is encouraged to consult with a professional at Lutz. Lutz is not a law firm, and no portion of the newsletter content should be construed as legal or accounting advice. 

ABOUT THE AUTHOR

402.763.2973

rkeenan@lutz.us

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ROBERT KEENAN + CHIEF INFORMATION & RISK OFFICER

Robert Keenan is the Chief Information & Risk Officer at Lutz with over 20 years of compliance and operational risk experience. He focuses on risk management, compliance, and security for the firm, and will partner with the operations team to drive process improvement and operational efficiencies for Lutz.

AREAS OF FOCUS
  • Risk Management & Compliance
  • Operations
AFFILIATIONS AND CREDENTIALS
  • Association of Certified Fraud Examiners
  • Society of Compliance and Ethics Professionals
  • National Society of Compliance Professionals
  • Certified Fraud Examiner
  • Certified Compliance and Ethics Professional
EDUCATIONAL BACKGROUND
  • BA in Finance, University of Oklahoma, Norman, OK
  • MPA, Drake University, Des Moines, IA
COMMUNITY SERVICE
  • Association of Certified Fraud Examiners - Heartland Chapter, Past Board Member

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OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

115 Canopy Street, Suite 200

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

Getting Out is the Easy Part + Financial Market Update + 6.2.2020

Getting Out is the Easy Part + Financial Market Update + 6.2.2020

FINANCIAL MARKET UPDATE 6.2.2020

STORY OF THE WEEK

GETTING OUT IS THE EASY PART

Famous studies conducted by Daniel Kahneman and Amos Tversky in the late 1970s described how individuals assess potential gains relative to losses. From that research, they developed what is known as Prospect Theory, which challenged existing views on how people make decisions. Daniel Kahneman would later receive the Nobel Prize in Economics in 2002 for the work.

Among the conclusions from the research was the fact that people feel the pain of a loss twice as intensely as the pleasure they feel from a gain. While we may not need a Nobel Prize winner to tell us people disdain losing money, the asymmetry in how people experience gains versus losses helps to explain why they go to great lengths to avoid the latter. This has been on full display in 2020. As the stock market decline deepened during the 1st quarter, many investors wanted out of their investments to avoid further losses.

I have written in the past about how impactful missing a few of the best days in a year can be on investment performance. An unfortunate reality is that many of the best days in the market seem to follow many of the worst days. So, if you liquidate your portfolio during a volatile period, you are likely to miss some strong rallies. The table below illustrates the average annual return on the S&P 500 going back thirty years (11.45%). It also shows what happens to the average annual return if the best days each year are stripped out.

  • If the best day of each year is missed, the average return declines by a third to 7.72%.
  • If the two best days are missed, the return is more than cut in half.
  • If an investor were to miss the four best days each year, the average annual return over the thirty-year period becomes negative!

Despite the high cost of being out of the market, the decision to get back in is very challenging. Some people will try to time the market on reentry, which is another (impossible) challenge. The recovery begins only after the market reaches its lowest point, presumably when expectations about the future are the grimmest. It requires a lot of courage to invest at that moment, and there is always the risk that things deteriorate further.

Others want the dust to settle and for things to calm down before they are ready to dip their toes back in. The problem with this approach is that by the time things are “calm,” the market has already rallied substantially. This appears to be the situation we find ourselves in currently.

The day after the S&P 500 hit the low, the market jumped more than 9%. Within three days, the market was up nearly 17%. As of June 1st, the S&P 500 has gained 36%. Even after this blistering rally, many are still not convinced we are out of the woods. It’s easy to see how people end up waiting so long that they are forced with the prospect of buying back in at a higher price than where they sold. That is a tough pill to swallow and can result in an investor remaining out of the market indefinitely.

There is no way to know if the rally will continue, or if we will end up retesting the low from March. What we DO know is that it is critical to be invested during those “best days,” because they ultimately drive a substantial part of a portfolio’s performance. Our instinct is to try to avoid losses, but getting out is the easy part. Investors must also consider the challenge of getting back in.

WEEK IN REVIEW

  • There were a handful of key data releases over the last week. 1st quarter GDP was revised lower from -4.8% to -5.0%. Personal consumption expenditures excluding food and energy (the Fed’s preferred inflation gauge) fell from 1.7% in the previous month to 1.0%. Business investment fell roughly 6% in April, which is bad, but much better than the forecast 15% decline. Finally, data published yesterday from the Institute for Supply Management (ISM) showed that the U.S. manufacturing sector continues to decline, but at a slower pace than the previous month.
  • Since 1997, when the United Kingdom returned control of Hong Kong to China, Hong Kong has enjoyed a favorable trading relationship with the United States under the “One Country, Two Systems” framework. This special relationship looks to be in jeopardy following a new Security Law that has been imposed on Hong Kong from China. It has led the U.S. to conclude that Hong Kong no longer has enough autonomy to continue the special relationship. This will have many consequences, potentially including more restrictive measures applied to about $66bn in goods traded between the two nations.  
  • Later this week, we will get an update on the labor market, with the ADP payroll report on Wednesday, initial jobless claims on Thursday, and the Nonfarm payrolls report on Friday.

HOT READS

Markets

  • Why the Stock Market is Up Amid Chaos in the Streets (CNBC)
  • What It Means For Investors if Hong Kong Loses its Special Status with the U.S. (CNBC)
  • All of the World’s Money and Markets in One Visualization (Visual Capitalist)

Investing

  • Latest Memo from Howard Marks: Uncertainty II (Howard Marks)
  • This is the Thing the Bears Hate the Most (Josh Brown) There is no good or bad, its better or worse
  • Why We’re Blind to Probability (Collaborative Fund)

Other

  • Hong Kong’s Security Law: What China is Planning, and Why Now (WSJ)
  • How Sleep Has Changed in the Pandemic: Insomnia, Late Bedtimes, Weird Dreams (WSJ)
  • Coronavirus Pandemic Claims Another Victim: Robocalls (AP)

ECONOMIC CALENDAR

Source: MarketWatch

MARKETS AT A GLANCE

Source: Morningstar Direct.

Source: Morningstar Direct.

Source: Treasury.gov

Source: Treasury.gov

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

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ABOUT THE AUTHOR

402.763.2967

jjenkins@lutz.us

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JOSH JENKINS, CFA + SENIOR PORTFOLIO MANAGER & HEAD OF RESEARCH

Josh Jenkins is a Senior Portfolio Manager & Head of Research at Lutz Financial with over nine years of investment experience. He is responsible for assisting clients in the construction, selection, and risk assessment of their investment portfolios. In addition, Josh will provide on-going research and trade support.

AREAS OF FOCUS
  • Asset Allocation & Portfolio Management
  • Investment & Market Research
  • Trading
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst (CFA)
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Lincoln, NE

P: 402.827.2300 | F: 402.827.2319 | E: contact@lutzfinancial.com | 13616 California Street | Suite 200 | Omaha, NE 68154

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Overview of the Coronavirus Food Assistance Program (CFAP)

Overview of the Coronavirus Food Assistance Program (CFAP)

 

LUTZ BUSINESS INSIGHTS

 

Overview of the Coronavirus Food Assistance Program (CFAP)

overview of the coronavirus food assistance program (CFAP)

Curtis thompson, tax director

 

On May 19th, 2020, the USDA announced the details of the Coronavirus Food Assistance Program (CFAP). The program will provide $16 billion of direct payments to farmers and ranchers that were adversely affected by the coronavirus pandemic.

The turnaround time on these payments has been made a priority by the USDA. Applications are set to begin on May 26th, and payments will be issued within a week of receiving the application. Producers will receive 80% of their maximum payment with the other 20% to be paid later as funds remain available. The sign-up period will end August 28th. Producers will apply through their local Farm Service Agency (FSA) service center. Applications can be downloaded from farmers.gov/CFAP. Be prepared with documentation to support sales and inventory amounts.

Some highlights include:

  • Participation in the Paycheck Protection Program will not affect eligibility for CFAP payments
  • There is a $250,000 payment limitation per entity/person. However, unlike other FSA programs, payment limitations have been expanded for limited liability entities (Corporations, LLC’s & Limited Partnerships). Historically these entities would only receive one payment limitation, but with the CFAP, each owner that spends at least 400 hours per year in either labor or management of the entity would qualify for an additional payment limit. Entities are capped at three payment limits ($750,000).
  • USDA has broken down the program into five different commodity areas:
    • Non-Specialty Crops (Corn, Soybeans, Sorghum)
    • Wool
    • Livestock
    • Dairy
    • Specialty Crops
  • The $900,000 average adjusted gross income test does apply to these payments. However, if 75% of adjusted gross income comes from farming, ranching, or forestry, then the $900,000 AGI limitation does not apply.
  • Currently there is a list of ineligible commodities that would not qualify for a CFAP payment. These include but are not limited to alfalfa, rye, rice, soft red winter wheat, hard red winter wheat, white wheat, rice, eggs/layers, and sheep more than two years old. The USDA may reconsider these commodities if they can find support of a five percent price decline.

Non-Specialty Crops

Non-specialty crop payments will be made upon the lower of 50% of the producer’s 2019 production or the 2019 inventory that was not sold as of January 15th, 2020. The producer then will take that number multiplied by 50% then multiplied by the applicable payment rate for that crop. If the producer has sold all of his/her 2019 production by January 15th, 2020, they will not qualify for a payment on that particular crop.

There will be two separate payments, one based on a CARES Act payment rate, and one based on the CCC payment rate. For example, the Corn payment would be $0.32 CARES Act payment and $0.35 CCC payment for a total of $0.67 per bushel. You can find the other commodity payment amounts at farmers.gov/cfap/non-specialty.

The maximum payment a producer will receive on non-specialty crops is 25% of the 2019 production. This payment will then be further reduced below 25% if the farmer has more than 50% of the crop sold by January 15th.

It appears if the commodity is hedged but unsold there is no penalty or reduction.

Example based upon less than 50% of crop sold by January 15th (max payment):

A farmer produced 200,000 bushels of corn in 2019. As of January 15th, 2020, the farmer had 125,000 bushels unsold. The calculation would be based on the lower of 100,000 (50% of 2019 production) and 125,000 bushels of inventory as of January 15th. The 100,000 would then be multiplied by 50% then multiplied by $0.67 per bushel. The farmer would receive a maximum payment of $33,500.

Example based upon greater than 50% of crop sold by January 15th:

A farmer produced 200,000 bushels of corn in 2019. As of January 15th, 2020, the farmer had 60,000 bushels unsold. The calculation would be based on the lower of 100,000 (50% of 2019 production) and 60,000 bushels of inventory as of January 15th. The 60,000 would then be multiplied by 50% then multiplied by $0.67 per bushel. The farmer would receive a maximum payment of $20,100.

 

Livestock

Livestock payments will be made upon the sum of the producer’s number of livestock sold between January 15th and April 15th, 2020, multiplied by the CARES Act payment per head, and the highest inventory number of livestock between April 16th and May 14th, 2020, multiplied by CCC payment per head. 

There will be two separate payments with one based on a CARES Act payment rate and one based on the CCC payment rate. For example, the Feeder Cattle (600 lbs or more) payment would be $139 CARES Act payment (cattle sold) and $33 CCC payment (inventory). You can find the other livestock payment amounts at farmers.gov/cfap/livestock.

Example:

A producer sold 300 head of feeder cattle (600 lbs or more) between January 15th and April 15th. The producer’s highest inventory of feeder cattle between April 16th and May 14th was 450 head.

The producer will be paid $139/head on the 300 head that were sold between January 15th and April 15th for a total of $41,700 CARES Act payment. They will also be paid $33/head on the 450 head that were in inventory between April 16th and May 14th for a total of $14,850 CCC payment. So, the producer would receive a total payment of $56,550 between the CARES Act payment and the CCC payment.

Please visit the USDA website for the most up-to-date information on this topic. If you need additional guidance on commodities not covered in this article (dairy, wool, or specialty crops), or if you have any questions, please reach out to your Lutz representative or email us at info@lutz.us.

ABOUT THE AUTHOR

402.463.8987

cthompson@lutz.us

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CURTIS THOMPSON + TAX DIRECTOR

Curtis Thompson is a Tax Director at Lutz with over seven years of experience in public accounting. His experience includes tax planning, consulting and compliance for individuals and closely-held businesses with a focus in the agriculture industry.

AREAS OF FOCUS
AFFILIATIONS AND CREDENTIALS
  • Amerian Institute of Certified Public Accountants, Member
  • Nebraska Society of Certified Public Accountants, Member
  • Certified Public Accountant
EDUCATIONAL BACKGROUND
  • BSBA, Peru State College, Peru, NE
COMMUNITY SERVICE
  • Hastings Give Day, Volunteer
  • Our Lady of Assumption Catholic Church, Member

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Getting Out is the Easy Part + Financial Market Update + 6.2.2020

Value is Historically Cheap + Financial Market Update + 5.19.2020

FINANCIAL MARKET UPDATE 5.19.2020

STORY OF THE WEEK

VALUE IS HISTORICALLY CHEAP

The stock market has staged a strong rally in recent weeks, gaining over 32% since bottoming on March 23rd. At this point, the S&P 500 is within 12% of its previous high and no longer represents a bargain. Luckily for investors, other areas of the market remain cheap by historical standards and continue to offer an attractive investment opportunity. Value stocks qualify here.

Value stocks represent a subset of companies whose share prices relative to some fundamental metric (such as book-value or earnings) are lower than the broad market. These stocks have historically delivered higher returns than the market, but for most of the period since the Financial Crisis of 2008-09, they have lagged. This trend has been exacerbated during the recent volatility that stemmed from the coronavirus response. As a result, the price discount of value stocks has been rapidly increasing. The chart below illustrates how big the discount for value has become. The higher the line goes, the cheaper they are. You can see that over the last 50+ years, they have never been cheaper!

Valuations have a strong tendency to ‘mean revert’ or return to normal levels after reaching extremes. This is evident in the chart above, where large discounts for value stocks compressed following the burst of the technology bubble in the late 1990s, and recovery from Financial Crisis in the late 2000s. Value saw strong relative performance after each of those episodes.

There is no way to know when value stocks will bounce back, and it’s entirely possible they will continue to get cheaper for an extended period of time. But while the S&P 500 as a whole may be getting more expensive, value stocks remain historically discounted. If the relative valuation normalizes, it should offer a strong tailwind for value investors.   

WEEK IN REVIEW

  • The market started this week off on strong footing, with the S&P 500 gaining 3.15% on Monday. This marked the largest single-day gain for the index since early April. Positive results from the clinical trials of a potential COVID-19 vaccine were largely credited for the rally.
  • Data published on Friday showed retail sales dropped 16.4% in April, versus an expected 12.3% drop. The clothing/accessories and electronics/appliances were the hardest hit categories, declining -78.8% and -60.6%, respectively. Online retail was the lone category in positive territory.
  • Following the furious rally in April, valuations for the S&P 500 are moving back toward expensive territory. The P/E ratio for the index increased to 19.7, which is higher than the February level of 19.5 and has likely increased further in May.

HOT READS

Markets

  • Most Investors Don’t Think This Rally Is For Real, According to Widely Followed Wall Street Survey (CNBC)
  • Be Careful Handling White Hot Moderna Shares (WSJ)
  • Terrible Retail Sales Report Shows Acceleration in fates of Struggling and Thriving Retailers (CNBC)

Investing

  • Nothing Fails Quite Like Success in the Stock Market (AWOCS)
  • Is (Systematic) Value Investing Dead (AQR)
  • The Beginning of the End? (IrrelevantInvestor)

Other

  • Federal Reserve Chairman Jerome Powell on the Coronavirus-Ravaged Economy (60 Minutes) Video
  • Starved for Action, Bettors Turn Nebraska Horse Track Into Must-See TV (NYT)
  • mRNA Vaccine Playlist (ReformedBroker)

ECONOMIC CALENDAR

Source: MarketWatch

MARKETS AT A GLANCE

Source: Morningstar Direct.

Source: Morningstar Direct.

Source: Treasury.gov

Source: Treasury.gov

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

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ABOUT THE AUTHOR

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jjenkins@lutz.us

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JOSH JENKINS, CFA + SENIOR PORTFOLIO MANAGER & HEAD OF RESEARCH

Josh Jenkins is a Senior Portfolio Manager & Head of Research at Lutz Financial with over nine years of investment experience. He is responsible for assisting clients in the construction, selection, and risk assessment of their investment portfolios. In addition, Josh will provide on-going research and trade support.

AREAS OF FOCUS
  • Asset Allocation & Portfolio Management
  • Investment & Market Research
  • Trading
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst (CFA)
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Lincoln, NE

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