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How the Federal CARES Act Will Affect the Real Estate Industry
Caroline Kaye CPA, Supervisor
With the passage of the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") on March 27, 2020 by Congress, there has been many questions about how the CARES Act will impact the real estate industry. For businesses, the provisions of the CARES Act are centered around increasing liquidity, such as through the deferral of payroll taxes, net operating loss changes, and the increase in the deductibility of business interest. Below are some of the aspects of the CARES Act that will benefit the real estate industry.
Payroll Protection Program ("PPP").
One of the provisions of the CARES Act is the establishment of the Payroll Protection Program from the Small Business Administration ("SBA"). The loan program is for up to two and a half times a company's average payroll for the 2019 year, up to $10 million. The loans are one percent fixed rate loans with the possibility of being forgivable. The potential for the loan being forgivable hinges on how the loan is utilized. Seventy-five percent (75%) of the loan must be used to pay payroll expenses and the remainder must be used for normal operating expenses (i.e. rent, utilities, healthcare for employees). It should be noted that independent contractors and companies without payroll are eligible for the payroll protection loan; however, the loan would not be forgivable.
Economic Injury Disaster Loan Program ("EIDL").
The Economic Injury Disaster Loan is also a loan provided by the Small Business Administration. The EIDL is a loan for up to $2 million with a payback period of 30 years. The loan has a 3.75% interest rate, and can be used in conjunction with the Payroll Protection Program as long as the loans are used to pay for different expenses. The EIDL also provides a $10,000 forgivable advance on the loan.
Small Business Administration 504 Loan Program.
The 504 loan program is available through Certified Development Companies (CDCs), SBA's community based partners for providing 504 loans. The loan program is designed to aid in the purchase of fixed assets, such as land, buildings and long-term machinery, as well as construction of buildings. The loan is 90% financing with fixed interest rates and longer amortization periods with 50% of the loan from the SBA and 40% for the loan from a participating lender, requiring the company to only pay for 10% of the costs.
Employee Retention Credit.
The CARES Act provides an employee retention credit for companies who continue to pay their employees in the wake of the coronavirus outbreak. The credit is for 50% of eligible wages up to $10,000 and is available for the 2020 tax filing year. This credit applies to companies that fall into one of two categories: 1) business is fully or partially suspended due to government shutdowns or 2) the company's gross receipts are below 50% of the comparable 2019 quarter.
Deferral of Payroll Taxes.
Companies are eligible to defer the employer's portion of Social Security and Medicare taxes. The taxes will be 50% payable at the end of 2021 and the remaining 50% payable at the end of 2022. The deferral is only available to those businesses that do not receive a PPP loan.
Qualified Improvement Property.
Qualified improvement property is defined as an improvement to the interior of a nonresidential building, except for improvements for: 1) enlarging the building, 2) an elevator or escalator, or 3) the internal framework of the building.The Tax Cuts and Jobs Act of 2017 classified qualified improvement property as real property depreciable over 39 years. While Congress intended to correct this with the passage of the Consolidated Appropriations Act of 2019, the correction never came. However, the CARES Act officially changed the classification of qualified improvement property to a 15-year depreciable life and eligible for bonus depreciation. Taxpayers may be able to amend their 2018 tax returns in order to take advantage of this technical correction.
Net Operating Loss ("NOL") Rules.
The Tax Cuts and Jobs Act of 2017 changed the Net Operating Loss Rules disallowing carry back of NOL's arising after 2017 and also limiting the NOL deduction to 80% of taxable income. The CARES Act suspends the change and allows taxpayers to carryback losses at 100% that are generated during the 2018, 2019 and 2020 tax years to the 5 previous tax years, and apply for immediate refunds of taxes paid in those years.
Business Interest Limitation.
The Tax Cuts and Jobs Act reduced the amount of deductible business interest expense to 30% for certain companies, including those with average gross receipts of $10 million or more. The CARES Act increased the allowable deduction from 30% to 50% of business interest for tax years 2019 and 2020. Furthermore, companies are allowed to choose between using 2019 or 2020 income for the calculation of deductible interest.
I encourage you to contact your CPA with any questions and concerns regarding how the CARES Act will affect you and your business. We, at Strothman and Company, are here to help and hope you are safe and healthy. Please reach out to let us know how we can best help you and your businesses survive through this pandemic.
Sources:
Urban Land Institute's webinar titled: The Federal CARES Act: Implications for the Real Estate Industry
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While You're Dealing with the COVID-19 Pandemic, Who is Watching Your Books?
Jennifer French CPA CGMA, Principal
With the COVID-19 pandemic, we are experiencing unprecedented times, that came upon us both quickly and unexpectedly. While navigating new waters in relation to the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"), including the Paycheck Protection Program and Loan Forgiveness, and working to keep your business viable, it's easy to lose sight of the day to day oversight of your company's financial processes. While you are dealing with the direct economic impact of COVID-19, who is overseeing the financial processes of your business? Unfortunately, during times like these, when our focus is diverted elsewhere, this is when fraud can be easily perpetrated as proper segregation of duties tend to go by the wayside.
For auditors, the "fraud triangle" is a framework commonly referenced in order to explain the motivation behind an individual's decision to commit fraud. When all three components exist, conditions for fraud to occur increase. The three components that comprise the fraud triangle are (1) opportunity, (2) incentive, and (3) rationalization. I was once told that no one will steal from you unless you allow them to. Ouch, this one was hard to hear, as oftentimes a lot of truths are.
- Opportunity - occurs when there is a lack of segregation of duties, controls or oversight over financial processes such as check processing, wire transfers, payments to vendors, issuance of credit memos, receipt of payments, dipping into petty cash, or etc.
- Incentive - normally, this occurs when there is financial pressure resulting from a lost job, sick relative, college loans, and etc. For example, a long-time faithful employee can have a life-changing event that changes their mindset in an instance. (In January, did you think this is where we would be?)
- Rationalization - this is when the perpetrator convinces himself or herself that the fraudulent act is acceptable. He or she could rationalize they are simply borrowing the funds and have the intent to pay it back at a later date, such as when the crises have passed.
Due to the increased risk of fraud during this time, what steps or preventative methods as a business owner or executive can you take? We are happy to share several cost prohibited steps you can take in order to mitigate the occurrence of fraud within your organization.
- Set the "Tone at the Top" by leading by example. Recommended processes for this are to have written policies and procedures, a "Code of Conduct", implement an "open-door" policy, establish an Ethics Policy that is published for all employees to see. Some companies have a confidential "fraud hotline", website reporting or email address to report suspected fraud. There are services you can hire to monitor calls or reporting, or you can simply have a dedicated line at work or email address that funnels directly to your human resources manager. Some companies extend this to customers and vendors as well, as their success coincides with your company's success.
- If you currently have strong internal controls in place, keep them. Do not compromise them during this season of change. If controls start becoming "lax", employees will take notice. Don't tell yourself you can review disbursements or bank statements a few months from now. If you do, it will most likely be too late to recoup losses due to a simple error, mistake, or the perpetration of fraud.
- If your organization does not have strong internal controls, now is the time to implement them. Segregation of duties is one of the key components of internal controls. One example is the employee who processes disbursements should not also be the one who approves the disbursements. The employee who bills customers, should not be the same employee who receives and applies the payments received from customers. Journal entries and credit memos should be reviewed and approved.
- Review the bank statement(s) in a timely manner. Login to the financial institution and download the statement yourself. When reviewing the transactions, ask the simple question, "does this make sense"? Look at who the disbursements are made to. Are the deposits reasonable? If not, ask. I have coached several clients to ask whether or not something looks suspicious just to instill to the employees that you're always looking.
- Ensure company assets and inventories are properly safeguarded. Are assets inventoried? Would you know if five laptops were ordered but only four were placed in service? If your company manufactures or distributes product, would you know if something was "sold out of the back door"? Are blank check stocks and signature stamps locked up?
- Monitor your employees' vacation balances. You may like that your "key" employee never misses a day or takes a vacation, but heed this as a warning sign. It could be this employee has something to hide and is worried fraudulent activity could be detected in his or her absence.
- Instill "job rotation" or ensure each financial position has a backup person. Thus, when an employee goes on vacation, ensure someone else performs their duties. Do not let his or her job sit and wait for their return.
- Compare budgeted amounts to actual results. Are the revenues reasonable in relation to what was expected? If expenses are higher than normal can you explain why?
- Take time to get to know your employees and engage them in conversation. Are they experiencing any hardships? Is there a change in attitude? There may not be fraud, but this allows you to be in tune with heavy workloads or frustrations that may exist.
- Verify your company has adequate fidelity bond coverage. A fidelity bond is a form of insurance protection that covers policyholders for losses they incur as a result of fraudulent acts by specific employees. Be sure to read the fine print. Oftentimes, they do not cover contractors or temporary employees. Thus, if you have an employee out on medical leave and hire a temporary employee during that time, this coverage may not extend to them. Discuss this with your policyholder.
- Engage an independent CPA firm to conduct an audit of the financial statements or perform an engagement relating to the assessment of internal controls. Having an outside party looking in can deter employees from committing fraudulent acts.
We are in this together and our firm is here to help each one of you get through this. Reach out if there are any questions or something you'd like to discuss. We'd love to hear from you, how your business is weathering this storm and know that you are safe and healthy.
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Has the recent stock market volatility caught you off guard? Do you know what to expect from your investments when the market is volatile?
We utilize a tool called Riskalyze to pinpoint your Risk Number and customize portfolios to which you are comfortable. We can also analyze your current investments to see how much risk you are actually taking. Then, we can compare the 2 to make sure you are not taking too much or too little risk and getting caught off guard. This exercise allows you to become a fearless investor so you always know what to expect, no matter what.
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U.S. Government Provides Relief to Individuals, Businesses in Midst of COVID-19 Crisis
On March 27, President Donald Trump signed into law a historic $2 trillion stimulus package designed to provide economic relief to individuals and businesses affected by the coronavirus pandemic.
Our aim in this alert is to give a brief overview of both the tax and non-tax provisions of the government's new stimulus legislation, including what type of assistance is available for individuals and businesses, how to apply for it, and what to do if you become unemployed. The summary is divided into two sections, one for individuals and one for businesses.
Individual Provisions
Stimulus Payments: Amounts and Eligibility
- Most adults will receive $1,200; each qualifying child under 16 years old will receive $500
- The amount you receive is based on your tax filing status and reported adjusted gross income (AGI)
- Single filers with an AGI of $75k or less will receive the full $1,200; with a full phase-out at $99k
- Married filers with an AGI of $150k or less will receive the full $2,400; with a full phase-out at $198k
- Heads of households with an AGI of $112.5k or less will receive the full $1,200
- Having qualifying children will increase the phase-out threshold slightly for all groups
- Those claimed as a dependent by another taxpayer will not receive any stimulus money
- Recipients need to have a legitimate Social Security number to receive payment, except for military members
- Currently there is only one stimulus payment scheduled; however, there has been discussion of additional future payments
Proof of Income
- If prepared, your 2019 tax return is the basis of your eligibility; if not, use your return from 2018
- If you still have not filed for 2018, you can use a 2019 statement from the Social Security administration as proof of income to qualify
Applying for the Payment and Receipt
- If the IRS has your bank information from prior tax filings, then you don't need to do anything. The money will simply be direct deposited into your account based on already filed income tax information
- Most people should expect to receive the money approximately three weeks from the bill's passage date
Other Considerations
- Unemployed persons are eligible to receive payments
- You will not need to pay income tax on these payments
- Generally, this payment is exempt from all forms of wage garnishment; however, not in all cases for child support garnishments
Unemployment Benefits: Who is Covered?
- The bill expands eligibility for unemployment benefits, including part-time and self-employed workers
- Self-employed persons are newly eligible for unemployment benefits and their benefit is calculated based on previous income using a formula from the Disaster Unemployment Assistance program
- Part-time worker benefits are state dependent
Amount of the Benefit
- Unemployment benefits still vary by state, but generally the bill aims to compensate for the average worker's paycheck by providing extra payments to cover the gap between traditional state unemployment and actual wages
- Eligible workers can get as much as $600 per week in addition to their state benefit; this includes self-employed and part-time workers
- States are free to pay the whole amount at once or send the top-up portion separately
How Long Will It Last?
- The bill provides an additional 13 weeks on top of whatever each state already provides; however, unemployment benefits cannot last more than 39 weeks total
- Those already receiving unemployment benefits are still eligible for the 13-week benefit extension as well as the $600 weekly benefit top-up
- The incremental $600 payment is only good for up to four months, through the end of July
Other Considerations
- Coverage also extends to those who can't work because they are required to self-quarantine and people unable to travel to work because of imposed quarantine restrictions
- If the main household earner dies as result of the coronavirus, the survivor is eligible for their unemployment benefit
- People who can work from home or are already receiving paid sick or family leave are not eligible
Student Loans
- For six months (April 2020 to September 2020) there is an automatic suspension of student loan payments for loans held by the federal government (private loans excluded)
- You may choose to keep paying down the principal if you desire
Retirement Account Rule Changes
- For 2020, the minimum distribution requirements on IRAs, 401(k), 403(b) plans, etc. are suspended
- This is not applicable to pensions
- Up to $100k may be withdrawn early without being subject to the typical 10 percent early withdrawal penalty; and income taxes owed on withdrawals may be spread over three years from the date of distribution
- To qualify for these exemptions, you need to prove the need was related to the COVID-19 outbreak, which includes if you, your spouse or a dependent tested positive for the virus or if you suffered adverse economic costs due to the COVID-19 crisis
- Loan limits on workplace retirement plans (401k, etc.) are doubled, allowing participants to take loans of as much as $100k if they can prove they've been affected by the pandemic
Charitable Contributions
- The bill creates a new charitable deduction of up to $300 available for those who can't itemize their deductions for donations to qualified charities
- The limit on charitable deductions (those that are itemized) are increased, allowing donors to deduct up to 100 percent of donations against 2020 AGI. For example, if you have $1.3 million in income, you can donate $1.3 million and deduct the entire amount
- Only cash gifts to public charities qualify; you cannot donate stocks or gift via private foundations to be eligible
Miscellaneous Provisions: Renter's Relief
- The law puts a temporary 120-day nationwide stop to evictions if the landlord has a mortgage from a governmental agency, such as Fannie Mae, Freddie Mac and others. Additionally, landlords are not allowed to charge penalties for delinquencies during this period.
Business Provisions
Charitable Deductions
- The 10 percent limitation on charitable donations is increased to 25 percent of taxable income
Qualified Property Improvements
- Businesses will have the option to write off costs that are typically only depreciable over a 30-year period, especially businesses in the hospitality industry
Small Business Administration (SBA) Loans
- Small businesses and non-profits that have 500 employees (full- and part-time) or fewer are eligible to receive SBA loans of up to $10 million
- The loans may be used to cover the cost of payroll, paid leave, group health benefits, mortgage and rent payments, utilities and interest on other debts
- No collateral or personal guarantees are required
Employee Retention Credit
- Employers are eligible for a payroll tax credit of up to 50 percent of wages paid during the COVID-19 crisis, which is defined as March 13, 2020, through the end of the year, up to a maximum credit of $5,000 per employee
- The credit is limited to employers whose operations have been suspended due to the virus outbreak or whose gross receipts have fallen by more than 50 percent compared to the same quarter in the prior year
Payroll Tax Deferral
- Employers can defer their 6.2 percent portion of the FICA tax (Social Security portion only), delaying payment over two years with 50 percent due in 2021 and the other 50 percent due by 2022.
Net Operating Loss (NOL) Changes
- The Tax Cuts and Jobs Act disallowed the carryback of NOL completely; and before this in 2018, only a two-year carryback was allowed. This bill allows a five-year carryback for losses from 2018, 2019 and 2020; and taxpayers can amend prior year's returns as well.
- The 80 percent limit on NOLs for these same years is removed, allowing a 100 percent reduction in taxable income.
Business Interest Expense Deductions
- Business interest that falls under Section 163(j) gets an increased deduction limit from 30 percent to 50 percent of taxable income for 2019 and 2020.
- 2019 taxable income can be used to calculate the interest limitation for 2020 if it's more favorable
- The above is not applicable to partnerships
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Beware of Free Money: Potential Legal Risks of the Paycheck Protection Loan Program
One of the most important provisions of the CARES Act for small businesses is called the Paycheck Protection Program (PPP). The PPP is a $349 billion program designed to assist small businesses (fewer than 500 employees) facing financial difficulties as a result of the COVID-19 pandemic through specifically structured loans.
The loan program offers funding to cover payroll for up to eight weeks, with the intent of stemming unemployment. These loans can be forgiven and essentially become a grant if your business meets certain criteria with no need to repay the money.
As the old saying goes, there's no such thing as a free lunch - or in this case, free government money. There are potential legal risks that could jeopardize the forgivability of the loan.
Conditional Grants
Another way to look at the PPP loans are as conditional grants. The U.S. Small Business Administration (SBA) notes that loans will be forgiven in full if the funds are used for appropriate costs. Covered costs include payroll, mortgage interest, rent and utilities. Further, the payroll costs must account for at least 75 percent of the loan proceeds used. The employer needs to maintain or quickly rehire employees and maintain wage and salary levels in order to receive 100 percent forgiveness.
The Devil's in the Certification Details
The loan application process requires certain certifications. Businesses that are still operating need to certify that the current economic uncertainty makes the loan necessary to keep operations going.
If this seems vague, it's because it is. There probably isn't a small business out there that is not facing significant uncertainty in the current climate. The problem is that the certification standard the PPP lays out is extremely subjective. As a result, with the encouragement for businesses to apply, many may do so under the impression that they will have their loan fully forgiven to only run into trouble later if they don't meet the certification standards.
Legal Risks
By not providing any definition about the nature or extent of the required impact to operations that would make the loan request "necessary to support ongoing operations," the SBA is making both applicants and lenders apprehensive.
Some law firms are even warning clients via their newsletters about potential legal exposure under the False Claims Act (FCA). Legal counsels are cautioning that
a misrepresentation included in an application could result in FCA liability. B businesses must navigate between being as aggressive as possible to bolster their application while staying within the rules of the program.
More Certification Guidance is Needed
The government agencies involved need to provide more clear and objective guidance on the conditions needed to meet the certification requirements of the loan application process. Without clear and definable guidance as to what constitutes facing economic uncertainty, small businesses could face problems in the future.
Objective criteria such as a percentage of revenue decline or order capacity would provide a rather bright-line test and give both guidance to businesses and confidence to the process.
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Answers to Common Questions About the Coronavirus Stimulus Checks
So many checks and even more questions! There is a lot of confusion out there over the details surrounding the coronavirus stimulus checks, so below we've compiled a list of frequently asked questions and answers.
- How much will the check be for? Each adult will receive $1,200; if you filed as married jointly, you'll get $2,400; with an extra $500 for each qualifying child.
- What if I didn't make any money last year or I was on a reduced income? It doesn't matter. There is no minimum income threshold you need to pass to qualify. However, if you did not file an income tax return for the 2018 or 2019 tax year, you'll need to provide your information at the following link so the IRS knows where to send your stimulus money:
- I heard that if I make too much money, I won't receive a check? On the other end of the spectrum, there are income limits based on your tax filing status. If you are single and made more than $75k, married and earned more than $150k, or a head of household with more than $112.5k in adjusted gross income, your stimulus check amount will start to phase-out, and many above these incomes will not receive anything.
- My income is under the threshold in 2018 but over in 2019. What are my options? In this case, you can wait to file your 2019 return and qualify to receive the check based on your 2018 tax return. This is easy to do this year given the automatic extensions granted for federal income tax returns.
- In 2020, my income is going to be higher than 2019 and put me above the thresholds. Will I have to pay back my stimulus check? No, there is no claw-back provision in the law, so you won't have to pay it back.
- Is my check taxable? No, it is not taxable income.
- I didn't need to file a tax return in 2018 or 2019 because my only source of income is Social Security Disability Income (SSDI) and my income was limited; do I have to file a return now to get a check? SSDI recipients don't need to file a return or take additional action. Their checks will be direct deposited or sent via mail - the same way they normally receive their benefits.
- I have a child in college who I claim as a dependent. Will either of us get a check? If your child is 18 years or older at the end of the tax year, you aren't eligible for the $500 check due to his age - even if you claim him as a dependent. Your child likewise won't get his own check since you claim him as a dependent - even if he works. There is a proposal to change this, but nothing firm currently.
- What about a senior parent whom I claim as a dependent? The same rules as above apply, so no. In order to get the $500 check per dependent, the person must both qualify as a dependent and meet the age requirement. Similarly, the senior parent cannot get his own check since you are claiming him as a dependent.
- We had a child in 2020. Will I receive a check for this child? Mostly likely not since the IRS would have no record of your new qualifying dependent based on your 2019 return.
- How soon will I receive my check? The government is planning on processing and sending out checks as soon as possible. Based on what the U.S. Treasury has said, as soon as possible means starting to process taxpayer information in April. How soon you'll receive your money after this depends on whether you've set up direct deposit with the government in the current or previous year tax filings. For taxpayers who don't have direct deposit set up, go here to input your information so the IRS knows where to send your stimulus money:
- I heard I can get my stimulus check faster if I pay to have it processed. Is this true? No, and beware because this is a scam. There is no legitimate way to skip to the head of the line.
- What happens if I owe the IRS back taxes? The stimulus checks are generally exempt from seizure for existing tax debts. This includes if you are on an installment payment plan to settle a tax bill. The one exception to this possibly could be for child support in arrears.
IRS Source for Non-Filer/Direct Deposit Information:
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Should You File an Amended 2018 Return?
During the holiday season in December, Congress passed the Consolidated Budget Appropriations Act of 2020. Included in this Act was a tax package that renewed more than 24 tax provisions through what are known as extenders. An extender makes a tax provision effective retroactively. Some of the extender provisions are rather esoteric, so we'll only focus on those most applicable to the broader taxpayer base.
Extenders in More Detail
Among the widely applicable extender provisions, there are the following. It's best to check with your tax professional to see which of the more than two dozen extenders may apply to your personal situation.
- Deducting PMI (private mortgage insurance) if you itemize
- The delusionality of some types of tuition and fees
- The ability to exclude debt forgiveness on a qualified residence
Wait, I Don't Understand What Happened?
Most people are probably wondering at this point how they can obtain the benefit of these retroactive changes, which were not allowed when they filed their original 2018 tax return. The answer is to file an amended tax return - or Form 1040X.
Taxpayers often need to file an amended return when they receive updated or changed inputs, such as when a brokerage sends a corrected Form 1099. Unlike this situation where the basis of your filing changed due to updated information, with the extenders you'll only want to file if it's to your benefit.
But Do I Have to File an Amended Return?
Tax law does not actually require that a taxpayer file an amended return when learning the original return submitted did not reflect the correct amount of tax. The assumption is that it was correct the first time. Amendments are allowed, but they are not mandatory.
If you do choose to file an amended return, you have to adjust everything to reflect the tax law and any changes in information received. You are not allowed to pick and choose only the favorable difference between the original and amended filing.
OK, But Should I File an Amended Return?
The answer to this question is probably a tax accountant's favorite - it depends.
The most frequent worry among taxpayers is that filing an amended return will trigger an IRS audit. This fear arises from the fact that generally returns are filed and processed electronically, but all amended returns are processed by live people. The biggest risk here is to not include a full explanation of the changes in the return, including what is different, why it's changed and the basis for the difference.
Refund or No Refund - Does it Matter?
Another question that often perplexes taxpayers is whether they should file an amended return if doing so will not result in an additional refund. Just because your amended tax return won't result in a check in your mailbox, there are situations where it's still to your benefit. One example is if the amended return will increase your capital or passive loss carryforwards.
The Sands of Time
Since amended returns are processed by people and not electronically, the turn-around time is a bit longer than most returns. The IRS says amended tax returns typically take eight to 12 weeks, but it's often longer.
Conclusion
While you might not have to file an amended return, it could be to your benefit from either the tax extenders, corrected information that arrived after your initial filing or a combination of both. Every taxpayer situation is different, so it's best to consult us.
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Understanding the Oil War between Russia and Saudi Arabia
Over the past six years, domestic crude oil has experienced a volatile ride. 2014 saw the emergence of American shale as producers were attracted to the $114 price levels. However, in 2016 the price for a barrel eventually fell to $27 as a global supply glut developed. 2016 also saw Russia and Saudi Arabia form an oil pact that drew together Russia and OPEC, leading to the so-called OPEC+ to navigate the global oil market. This agreement would eventually culminate into the current crude oil tensions that exist between Saudi Arabia and Russia.
Through the early 2000s - up until the financial crisis of 2008 - increasing global demand accounted for the rising price per barrel of oil. After reaching a high of $147.27 the week of July 7, 2008, the financial crisis' effects brought the price of West Texas Intermediate Crude down to a low of $32.98 in December of 2008, according to the U.S. Energy Information Administration. However, with the economy recovering through 2009, the price of WTI crude oil rose to the high $70s and low $80s.
After the world emerged from the financial crisis, world oil markets were rocked by geopolitical tensions from the political revolution in Egypt during January 2011, spiking the price of crude oil to $100 a barrel. Prices stayed in the $90 to $100 per barrel range, until the end of 2014. With increased production in North America, reduced demand from emerging economies and increased storage of crude worldwide, the price per barrel of crude oil in 2016 traded in the low $30s per barrel. The price of oil fell because Saudi Arabia attempted to flood the world market with excess oil to lower the per barrel price to bankrupt the emerging U.S. frackers.
In reaction to the low oil prices, OPEC and its non-OPEC oil-producing countries agreed to reduce their total output by 1.8 million barrels in December 2016, taking effect in January 2017. After OPEC reversed itself and increased output in June 2018, it again cut output for 2019. The price of WTI rose to the mid-$70s by October 2018, which can also be attributed to a drop in Venezuela's oil production, and the re-introduction and increase in severity of sanctions against Iran.
A November 2018 report by the U.S. Energy Information Administration (EIA) relayed that the U.S. produced 11.3 million barrels in August 2018. With the report's news, additional Russian oil production and even some OPEC countries producing more, it brought WTI down to $51 per barrel. Fast forward to March 2020, with the coronavirus sending shockwaves and diminishing demand, oil prices fell.
This led to a meeting in Vienna on March 5 for OPEC and its (+) or other major oil-producing companies throughout the world to discuss production cuts in hopes of increasing the price of oil. During this meeting, OPEC and its (+) members discussed whether to reduce production by 1.5 million barrels a day through the end of June 2020. OPEC asked Russia and those (+) members to cooperate with the production cuts. However, on March 6, Russia did not agree to reduce oil production. This immediately dropped the price of oil by 10 percent.
With the coronavirus pandemic beginning at the end of 2019, manufacturing and transportation decreased, reducing the global thirst for oil. Based on these events, the International Energy Association (IEA) announced in the middle of February that global consumption would fall to 825,000 barrels per day.
Russia said that reducing production was premature because it was and still is uncertain of how the coronavirus will affect global oil prices. Additionally, they cited political instability in Libya, where approximately one million barrels per day were expected to be offline from production.
In light of the unknown extent of the coronavirus pandemic's impact on oil demand, Russia and its oil producers reportedly offered to maintain the existing 1.7 million barrels per day cut for the next three months that OPEC+ already had in place. However, OPEC didn't agree to this offer.
Beginning on March 8, Saudi Arabia gave crude oil buyers discounts of between $6 and $8 per barrel to European, Asian and American buyers. This set a downward cascade of the price of oil, lowering Brent Crude by 30 percent and West Texas Intermediate by 20 percent.
Starting March 9, the drop in oil prices coupled with the global coronavirus pandemic exerted a major impact on world markets. Russia's ruble dropped by 7 percent shortly thereafter. While the price of oil recovered a little after the impact, it set off a production war between Russia and Saudi Arabia. Beginning March 10, Russia began pumping an additional 300,000 barrels per day, and Saudi Arabia ramped up its production to 12.3 million barrels per day, up from 9.7 million.
Impact on Markets
These two factors led the Dow Jones Industrial Average to drop more than 1,300 points in pre-market trading on March 9, with the DOW ultimately falling 2,000 points during intraday trading. Along with NASDAQ falling by nearly 7 percent and the S&P 500 dropping more than 7 percent, global markets fared worse. This was evidenced by the Italian FTSE MIB Index losing more than 11 percent.
Producer Implications
When it comes to how the crude oil war is impacting shale producers in North America, it's important to note that prices of $40 per barrel must be sustained to keep producers afloat, according to consultant Enverus. However, production cuts are imminent at the bottom of the $30 a barrel price point, and there's certainly no expectations of new oilfield development.
Based upon forecasts from the U.S. Energy Information Administration, May 2020 U.S. production of crude oil is expected to drop from 13.2 million barrels per day to 12.8 million barrels per day by December, finally leveling off to 12.7 million barrels per day in 2021.
Much like the volatility going on with the coronavirus pandemic, global markets are also expecting further volatility for the world's energy market.
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New to Remote Working? Here are Some Tips for Staying Productive
The COVID-19 pandemic has seen a rise in
remote working. Even organizations that have always been against it have their employees working from home. With some areas experiencing complete lockdowns, this means you find yourself in an unfamiliar work environment.
Remote working means that you have to work outside a traditional office environment. Although some people already have experience working remotely, there are a good number of workers who might have a hard time getting anything done from home. This is particularly true for those with a family that includes young children.
But with the current epidemic, many don't have much choice other than to agree with the concept that work doesn't have to be done in a specific place to be performed successfully. Your employer may have already set a work-at-home policy, but how do you ensure you are productive? Here are a few tips to help you retain your employment.
Create a Workspace
If you don't already have a home office, then it's time to be resourceful and create a workspace. Unfortunately, since this is unplanned, you might not have an ergonomically friendly work area. This means you could hurt yourself while working; for example, sitting too long in an uncomfortable position. But think outside the box and utilize what you have, such as using pillows to create a comfortable posture. Also, ensure you take frequent breaks.
Don't forget to choose a space with minimal distractions.
Establish a Routine and Stick to It
The fact that you no longer have to wake up early to get to the office might tempt you to sleep more. It is important to have a work mindset. To achieve a sense of normalcy that you were used to in the office, you need to plan a schedule for your work hours and stick to it. Failure to create a work routine may find you wasting work hours.
Remember, if you live with family or friends, let them know your work hours and have them respect that.
Be Flexible
It's important that you be flexible, especially if you have kids in the house. This makes it hard to work a 9 to 5 job. A lockdown means you probably do not have someone to come over and help with chores or childcare. The way out is to experiment with different plans. Try working late at night, early in the morning or when your children take a nap.
Use Time Management Apps
Your employer already set goals and roles for you. But achieving them while working at home is challenging. Use time management apps to track the amount spent working on tasks. Such apps, whether web or mobile-based, can help minimize distractions.
Avoid Social Media
There is so much information on the coronavirus pandemic and there is a need to stay updated. But this can turn out to be a distraction that causes you to miss out on work time. Set a time to check such updates and stick to it.
Informal Communication Groups
Apart from official online meetings or discussions, it's good to keep in touch with colleagues. If your company did not set up such meetings, then you should. There are many communication tools available today that you can use. Keep in mind, isolation can lead to depression, especially if you live alone and are used to an active social life.
Work-Life Balance
Don't spend all of your day working. Set daily tasks and stick with them. Set a time to exercise; it's good for productivity and helps you avoid getting sore, which will generally affect your health. Log off from your work and do a different activity.
Use Secure Connections
Cybercriminals are now more likely to target remote workers. There are already reported cases of coronavirus ransomware and malware. This not only affects your work but can put your company at risk. Ensure that you use a secure wifi and virtual private network (VPN). Most importantly, don't ignore your company's security policies just because you are working from home.
Final Thoughts
There is a lot of debate surrounding remote working. Employers may see the benefit of remote working and adopt it more. Whether this will be the case, only time will tell. But we should brace for unexpected changes in the workplace when things finally get back to normal.
The most important thing right now is to keep in mind that your productivity will depend on your self-discipline, time-management skills, technology skills (to use new apps) and adaptability.
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6 Financial Tips for an Emergency
The effect of the coronavirus on our lives is unprecedented. While we're all sheltering in place while trying to manage our daily tasks, it's undoubtedly taking a toll on us mentally, physically and financially. Here are some tips to help you weather this storm of economic uncertainty.
Get Started on Being Liquid
Experts suggest having three to six months of savings on hand. However, this might not be realistic for some. Don't despair:
start saving now.
If your employer pays you via direct deposit, ask if they'll deposit a percentage into your savings. If that's not an option, have your bank withdraw a portion and deposit into your savings on pay day. This way, putting aside money for a crisis will be part of your routine. Further, a good rule of thumb is to budget 50 percent of your income to essentials like housing and utilities, 30 percent toward non-essentials and 20 percent toward financial goals like savings and paying down debt. You can do this!
Analyze Your Expenses
Perhaps setting aside a small amount of money just won't work for you. Mariel Beasley, co-founder of the
Common Cents Lab at Duke University, an organization that aims to improve the financial well-being of low- to moderate-income Americans, suggests taking a hard look at your expenses.
- See if you can downgrade. For instance, consider getting a cheaper phone, cable or internet plan.
- Set up a restrictive budget. When it comes to discretionary spending, think about using a pre-paid card. You can reload this weekly. If seeing the green stuff actually leave your wallet helps you cut back, then a cash-only system might be a good solution.
- Try to find extra work. While this situation is causing furloughs in some industries, it might create jobs in others. For instance, Amazon is said to have hired 100,000 new employees. Research other companies that specialize in deliveries. Since everyone is homebound, this could pan out well -- if you like this kind of work. If you do, remember your hand sanitizer, gloves and mask. If you don't, scour the job boards in your area. You might be surprised what you find.
Solutions for People Over 59
There
is
an upside to aging: you can make withdrawals from your IRA or 401(k) if things get really rough. However, Beasley suggests that you withdraw funds in small amounts. If you're under 59 and really have no other alternative, you can withdraw from your retirement. But know that there will be penalties and taxes. However, in times like this, sometimes you've got to do what you've got to do.
Avoid High-Cost Credit Cards
While these modern conveniences can be lifesavers, the downside is high interest rates. Apply for cards with lower rates; or even better, find those that offer
balance transfers at zero percent for a limited time.
Disregard the Goal
Many financial experts say: keep your eyes on the prize - build your nest egg. But if you're just getting started, it might feel overwhelming. Or, if you're in the midst of a world crisis like we are now, it can feel doubly overwhelming. Instead, focus on saving a little at a time. Baby steps. Even having a small amount of money set aside can help in times of need, like buying groceries during a quarantine.
Ask for Help
If you're
really
feeling the pinch, reach out to your landlord, mortgage lender, utility provider, credit card companies or anyone else you owe. In Seattle, the public utilities companies are promising they won't shut off services during this pandemic. The same might be true for your community. But the point here is this: make the call. Send the email. Propose a payment plan. It's reasonable to assume that most people have a heart and don't enjoy adding financial stress to the already difficult situation we're in.
If you can't apply any of these tips your present circumstances, don't worry. Be well and stay safe. Perhaps when this passes, you might look back at these ideas and see which work best for you. Remember, we're all in this together.
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The Economic Impact of Coronavirus
In the days ahead, the COVID-19 pandemic will likely be described in economic terms as a Black Swan. This phrase is used to describe an event that: 1) was unpredictable; 2) causes severe and widespread consequences; and 3) in hindsight was determined to be wholly predictable.
What will be interesting going forward is how much the virus, and its impact on the economy and financial markets, ultimately affects individual portfolios. It's worth noting that many economists spent the whole of 2019 cautioning that a recession and market correction was imminent. To what extent investors took heed and repositioned their portfolios is yet to be seen.
As predicted, the Federal Reserve might have already exhausted the tools it had available to prevent a further watershed in the markets. Initially, the central bank dropped the federal funds rate to zero and funneled money into the economy. In more recent weeks, its monetary policies have included aggressive purchasing of Treasury bonds and mortgage-backed securities, extending swap lines to foreign central banks, and propping up short-term corporate borrowing and money market mutual funds to help support lending to state and local governments. At first, these efforts appeared to do little to diminish the stock market slide, but the end of March saw a three-day rally with the Dow Jones Industrial Average seeing its biggest three-day jump since 1931.
On the fiscal policy side, Congress is rushing to pass monetary aid as well as stimulus and recovery funds for both individuals and businesses. However, these actions can do little to stop an airborne virus that continues to shutter jobs and businesses and threaten the viability of the country's health care system and everyday life as we know it.
Portfolio Considerations
When it comes to your own financial risk, let's look at first things first. For many investors, an initial reaction might be to panic sell holdings before portfolios drop any further. Unless your timeline for needing funds has accelerated, selling now is not generally advisable. What is important to bear in mind is that markets tend to recover quickly after the most significant market declines, so if you're not invested during the recovery, any paper losses you're experiencing now will be permanent.
It is worth taking a good look at your holdings to get an idea of what to expect. For example, companies that rely on global supply chains and offshore manufacturing will likely experience the most detrimental short-term impact from the pandemic. This means disruptions in technology, retail, auto manufacturing, travel and tourism, global delivery and oil prices.
On the other hand, the health care industry will likely see tons more investment and demand while the so-called FAANG stocks (Facebook, Apple, Amazon, Netflix and Google) are poised for rampant growth - given the degree to which people are stuck at home using online and delivery services.
Bear in mind that if you make any changes to your portfolio in reaction to market volatility, take into consideration your long-term goals and financial security. The following are a few strategies to consider that could position your portfolio for subsequent growth - assuming you maintain a long-term perspective.
- Use either spare cash, asset allocation rebalancing opportunities or automatic investment contributions to bargain shop for stocks with a strong track record that are likely to recover but are well-priced right now.
- Now might be a good time to convert (tax-deferred) retirement account assets into a Roth IRA. By doing so now, when prices are at their lows, you'll owe less tax at the time of the conversion - which you won't have to pay until next year's tax season. By that time, the market may have recovered, positioning your Roth for greater potential for tax-free growth and tax-free income during retirement.
- Consider using a portion of your assets to pay a lump sum premium for an annuity contract in order to transfer market risk from your portfolio to an insurance company. An annuity is designed to provide insurer-guaranteed income during your retirement, so you can feel a bit better about maintaining an equity allocation during this volatile time until the rest of your portfolio recovers.
The spread of the COVID-19 coronavirus is likely to continue to drive investor uncertainty over the short term. The long term, however, is another matter. Just like the saying, "What goes up, must come down," history has shown that when it comes to the stock market, what goes down inevitably goes back up. The question is just how long that will take. For now, this is one of those times when it's handy to have a three-to six-month emergency cash fund available to cover expenses.
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Understanding Three Revenue Metrics
According to the 2019 Small Business Profile, a project from the U.S. Small Business Administration's Office of Advocacy, there are 30.2 million small businesses, making up 99.9 percent of all U.S. businesses. With 59.9 million of these small business employees making up 47.3 percent of workers in the United States, it's clear that this is an important segment of the American economy. With small businesses striving for profitability, the following are some examples of how they can measure their revenue targets, helping them increase their chances of profitability.
Average Revenue Per User (ARPU)
This ratio can also be referred to as an average revenue per unit to measure how much revenue can be generated by each customer. The ARPU is calculated as follows:
ARPU = Total Revenue / Average Subscribers
As the name implies, Total Revenue is how much revenue a business earned over a certain period. Average Subscribers refers to the average number of subscribers over a certain time frame.
If a business wants to analyze how much revenue their business is generating per individual/customer, it can be over a month, a single year or over multiple years. To calculate how many Average Subscribers exist for a 12-month period, the business would measure their customer base at the beginning and ending of the year. That sum
mation would then be divided by two. The following would occur:
Year 1: $1,000,000 / (100,000 + 200,000 / 2) = 6.7
Year 2: $4,000,000 / (200,000 + 400,000 / 2) = 13.33
Based on this two-year analysis, the company has become more profitable over time. Along with a company comparing its internal statistics, this measurement can show investors or financial analysts which company is more profitable depending on which business has a better ratio.
Average Revenue Per Paying User
Businesses use this ratio to determine how much revenue, on average, the organization receives from each paying patron. While this sounds close to the ARPU, the main difference is that with this ratio, only customers who have made a payment are factored. It shows a business how profitable the customer is and what the customer's average contribution is toward the business' revenue. It's calculated as follows:
ARPPU = Total Revenue / Average Number of Paying Users
The top part of the metric consists of all revenue earned by a company over a set period. The bottom part is the weighted average of all of the paying users during the same time frame the Total Revenue is earned. Depending on the time frame, it could be measured as average revenue per paying daily active user or the average revenue per paying monthly active user.
A real-world example illustrates the concept:
If a company has 1,800,000 customers for its total user base and 60 percent of these are a paying user base (or 1,080,000 have paid), the paying user base would be used to determine its ARPPU over a 12-month period. Assuming a company made $2,000,000 in total revenue for the same 12-month period, the calculation is as follows:
$2,000,000 / 1,080,000 = $1.85
Along with helping to determine how to increase sales to increase the average ARPPU, it also helps separate the non-revenue paying customers. This segment can be identified and targeted through emails, surveys, calls, etc., to see what's holding them back from becoming a paying customer. Unmet need such as new payment options, or different subscriptions can be identified through customer inquiries.
Average Revenue Per Account (ARPA)
This type of financial measurement helps businesses know how much revenue each client's account generates over a specific period of time, generally done per month or every 12 months. This metric determines which account and the associated product or service related to the account loses money, breaks even or is profitable.
It's noteworthy to point out that an individual customer might have more than one account. While it's not recognized by Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS), it is usually included on a company's financial statements and often goes into discussions with potential and existing investors.
This metric is calculated as follows:
ARPA = Total Revenue over a certain period (1 month or 1 year) / Number of accounts held over the same period
If a company is generating $2,000,000 in revenue per month and has 2,000 accounts, the ARPA is $1,000
Some considerations for this metric include measuring customer accounts accurately. For example, if a new product or service is introduced in the following year, it's good to separate one year from the next to see if one year's product is better than last year's product, or if the new product is underperforming compared to the previous product generation.
While these are only a few examples of measuring profitability, it's a good start to see how a business is performing on a regular basis.
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