Clarity Capital Management Weekly Notables - April 3, 2020

“The key to making money in stocks is not to get scared out of them.”

-Peter Lynch

As of Friday of last week, the House officially passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a $2 trillion emergency fiscal stimulus package, in order to help ease the effects of the resulting economic damage.  I outlined many of the provisions last week after the Senate passed the bill.  Since it was officially signed into law on Friday, I thought it would make sense to outline many of the main provisions of the bill again.  Most remain the same as to what I had outlined last week, however, I've made some additional updates.

Here are some of the provisions.

•  Big Businesses: About $500 billion can be used to back loans and assistance to companies, including $50 billion for loans to U.S. airlines, as well as state and local governments.
• Small Businesses: More than $350 billion to aid small businesses.
•  Hospitals: A $150 billion boost for hospitals and other health-care providers for equipment and supplies.
• Individuals: Direct payments to lower- and middle-income Americans of $1,200 for each adult, as well as $500 for each child. Senate Minority Leader Chuck Schumer said checks would be cut April 6.
• Unemployed: Unemployment insurance extension to four months, bolstered by $600 weekly. Eligibility would be expanded to cover more workers.
• Restrictions on Business Aid: Any company receiving a government loan would be subject to a ban on stock buybacks through the term of the loan plus one additional year. They also would have to limit executive bonuses and take steps to protect workers.
• Transparency: The Treasury Department would have to disclose the terms of loans or other aid to companies, and a new Treasury inspector general would oversee the lending program.
• Democrats: Won language that would bar any business owned by President Donald Trump or his family from getting loans from Treasury. Businesses owned by members of Congress, heads of executive departments and Vice President Mike Pence also would be blocked.

 Here are more of the details as it relates to individuals, with the caveat that this particular bill is a staggering 883 pages long, so its impossible for me to go into that depth here!  So i'll stick with some bigger takeaways.
 

• Checks - The US Treasury will be sending checks to individuals of $1200 and joint filers $2400.  Taxpayers will also receive an additional $500 for each qualifying child. 
  • Joint filers with income under $150K, HOH under $112.5K and everyone else under $75K, will receive the full amount.  For ever $100 over the applicable threshold, you lose $5 of the rebate.
  • Joint filers over $198K, HOH over $136.5K and everyone else over $99K get nothing.
  • This is based upon 2019 tax returns, if they've been filed.  If your 2019 return has not yet been filed, they will base it upon 2018 returns.
  • Those receiving Social Security retirement and disability would be entitled to the cash payment as well. 
  • Funds are set to be sent via ACH bank instructions on file with the IRS.  Apparently, the IRS is working on a portal for individuals to update their banking information in case it has changed - this could delay payments for some people.
• RMD's - The provision waives the required minimum distribution rules for certain defined contribution plans and IRAs for calendar year 2020. This provision provides relief to individuals who would otherwise be required to withdraw funds from such retirement accounts during the economic slowdown due to COVID-19.
• Retirement Withdrawal Penalties - 10% IRS premature distribution penalty waived for retirement account distributions of up to $100k taken in 2020 (still taxable, just no penalty). 
  • Income is allowed to be spread over the 3 years, unless elected to be taken all in 2020.  There are some eligibility requirements (having to do with the virus as you could imagine), but I won't go into the specifics here.
• Expanded FSA/HSA/MSA use - These accounts can now be used to purchase over-the-counter (not just prescription) drugs and medicines as well as "menstrual care products." Please note that you may not be able to use your HSA or FSA debit card to purchase these newly-qualified items until retailers have updated their systems. Remember to keep your receipts so you can submit claims for reimbursement.
• Charitable Contributions - The bill includes a completely new above-the-line deduction for certain taxpayers who make charitable contributions of up to $300.  This is also a permanent change 
  • Above the line means it is deducted to calculate an individual's adjusted gross income (AGI).  This means you do not have to itemize in 2020 to capture this benefit!
  • contributions must be made in cash, and cannot be used to fund a Donor Advised Fund or 509(a)(3) supporting organization.
• Student Loans - Loan payments are suspended for Federal loans through 9/30/2020, during which time no interest will accrue, and voluntary collections will also be suspended. 
  • One very important point for those working towards PSLF!  Suspended months COUNT towards the loan forgiveness programs!  that is amazing!
  • I would stay on top of your loan servicer to make sure this is all done as it should be.
• Unemployment Benefits - An additional $600 per week payment to each recipient of unemployment insurance or Pandemic Unemployment Assistance for up to four months. 
  • The amount a person could receive will vary by state.  However, benefits are aimed at expanding the amount received to try and match the average workers paycheck.  We'll see how this shakes out.
  • These benefits would also apply to self-employed individuals.  Benefit amounts would be calculated based on previous income, using a formula from the Disaster Unemployment Assistance program.
• Businesses - More than $350 Billion in aid to small business.  There's a lot to unpack on this one, so i'll keep it light and not go into detail. 
  • Employee Retention Credit - short answer - worth up to 50% of qualified wages paid with respect to each employee and it goes towards employment taxes.  Longer answer - there's much more to it!
  • Deferred employment taxes for businesses that don't qualify for the above.  Deferred from the date of enactment, with half of deferred tax due 12/31/21 and other half due 12/31/22.
  • Net Operating Losses from 2018 - 2020 can be carried back up to FIVE years and fully offset income. 
• Business Relief - There are some major business relief options available to businesses as part of the package.  I will outline them, but there is far too much detail to go into here 
  • Economic Injury Disaster Loan (EIDL) - is what many are calling a $10,000 grant for those who submit an application for disaster assistance. It works more like an advance that does not require repayment—whether or not your loan application is approved. In other words, if you meet the qualification criteria to apply for an EIDL loan, submit an application to the SBA, and you will receive a $10,000 advance within three business days—that does not need to be repaid.
  • Paycheck Protection Act - Small businesses and eligible nonprofit organizations, Veterans organizations, and Tribal businesses described in the Small Business Act, as well as individuals who are self-employed or are independent contractors, are eligible if they also meet program size standards.  Under this program: 
    • Eligible recipients may qualify for a loan up to $10 million determined by 8 weeks of prior average payroll plus an additional 25% of that amount.
    • Loan payments will be deferred for six months.
    • If you maintain your workforce, SBA will forgive the portion of the loan proceeds that are used to cover the first 8 weeks of payroll and certain other expenses following loan origination.

Other Notes:

• Tax return deadlines (for income tax, estate tax, and gift tax returns) are delayed from 4/15 to 7/1.  Payments due for those returns are delayed to 7/15 as well.  Most, but not all, states have moved their deadlines to match (Oregon has extended to align with the IRS).
• Estimated income tax payments that would have been due on 4/15 are also delayed to 7/15 (but the 6/15 estimated tax payment is not delayed).  
• Prior year retirement plan and HSA contributions have a 7/15 deadline now too.  

 We've continued to see some major moves in the stock market over the past week, in both directions.  Its likely that we'll continue to see more volatility in the markets as more and more data is released in the coming weeks, both in regards to the virus, but also in regards to the economy and companies as earnings are released, jobless claims and monthly employment numbers are released.  Its always possible the market could move quickly in either direction in the near-term, so the same chorus continues to be sung.  Be prepared for more volatility in the coming weeks until we can begin to receive more certainty around this virus.  Please keep in mind that the stock market will move up in advance of good economic news. Therefore, it's possible that other positive news (such as any positives on controlling the virus) may trigger a stock market uptick. After all, if we figure out how to kill off this virus and/or prevent it from infecting others, the path back to "normal" will be much clearer.  

 To Sum It Up

• The coronavirus situation is rapidly evolving
• It seems inevitable that there will be at least a short-term, negative impact on the economy, which we're already witnessing
• We are monitoring the situation and Client portfolios on a constant basis.
• We’ll make portfolio changes (i.e. rebalancing) as becomes necessary as part of our normal portfolio management process.
• Continue to keep a long-term perspective, as we will eventually get through this!

Financial advice is a public service in these times, and I’m here to help. Please forward this email to any friends and loved ones who have been affected by the coronavirus and who might need some help. If you have questions about how the slew of recent changes could affect you, please reach out and we’ll find a time to talk.

Stay healthy and stay sane!

Best Regards,

Ryan Mohr, CFP®