How to Get Your PPP Loan Forgiven

How to Get Your PPP Loan Forgiven

We’re now about six weeks into the CARES Act and in round two of the Paycheck Protection Program.  The $310 billion allotted to the program in round two is beginning to dwindle, but has lasted longer than most bankers expected.

There could be another round of stimulus that replenishes the program over the next few months, of course.  There seems to be widespread effort in Washington to ensure that businesses that need PPP funds are able to get them.  Who knows whether that will eventually happen.

For many of the businesses the most pressing question is no longer how they can access the program & obtain funds to keep their operations going.  It’s what must I do to have this loan forgiven?  This post will cover what we know so far.

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The CARES Act Revisited

The CARES Act Revisited: Updates to the Paycheck Protection Provision

A lot has happened in the past week.  And now that we’ve had an opportunity to read through more details of the Paycheck Protection Provision, it’s become clear that the program’s rollout will be messy.  In fact, it already is.

Last week I wrote a post outlining a few of the provisions in the CARES Act meant to provide economic relief to small businesses.  What we’ve come to realize in the last few days is that the Treasury Department has a great deal of latitude in how these programs will actually be offered.

For example, the permits the Treasury Department to issue up to $349 billion of loans to small businesses through the Paycheck Protection Program.  Businesses with fewer than 500 employees can apply through an SBA approved lender for loans up to either 2.5x their average monthly payroll over the previous year, or $10 million (whichever is less).  The bill stipulates that the pay back period for the loans may be stretched out to up to 10 years, with an interest rate no higher than 4%.

Then, early last week, the Treasury Department stepped in and communicated that all loans will have a two year amortization period and 0.5% interest rate.  And on Thursday, Secretary Mnuchin announced another interest rate revision to 1%.

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Unpacking the Coronavirus Stimulus Bill

Unpacking the Coronavirus Stimulus Bill

As you may have heard, the Coronavirus stimulus bill was signed into law by president Trump last week.  The package is called the CARES Act, and provides over $2 trillion of economic stimulus across a variety of channels.

My first thought here is sheer size of the package.  $2 trillion is a TON of money.  While at some point I’ll look into how the package will be paid for, I’ve spent more of my energy recently learning what’s in it.  The bill includes a mix of forgivable loans to small businesses, bailouts to corporations in certain industries, and checks mailed directly to taxpayers falling under a certain amount of adjusted gross income.

For many of our clients at Three Oaks Capital, there is urgency surrounding the relief opportunities for small businesses.  This post will cover the four sections I think are most relevant.  I’ll circle back and try to cover implications and opportunities for individuals in a subsequent post.

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Where Do We Go From Here? Market Thoughts & Financial De-Leveraging

Where Do We Go From Here? Market Thoughts & The Risk of Financial De-Leveraging

Well that escalated quickly.  We are now officially in the second fastest bear market on record.  Bear markets become official when stocks fall 20% or more from their peaks.  Ordinarily this takes months to play out.  Bad news comes out, stocks sell off a bit.  Everyone goes home, thinks about it, and comes back the next morning.  More bad news comes out, stocks fall a bit further, and so on.  Here’s some data from Marketwatch on how long it typically takes to enter a bear market:

Where Do We Go From Here? Market Thoughts & Financial De-Leveraging

With the Coronavirus driving the U.S. and much of the world to shelter in place, our economy has come to a screeching halt.  Some forecasters are guessing that we’ll see a 5% drop in GDP this quarter, others are predicting as much as a 30% drop.

Whatever camp you reside in, the picture is not pretty.  Markets did not take long to notice.  Whereas it takes on average 136-137 trading days to enter a bear market based on the data above, it only took us 19 to get there this time – the second fastest on record:

Where Do We Go From Here? Market Thoughts & Financial De-Leveraging

So where do we go from here?  A stimulus package is just about to be passed (finally).  Markets rebounded as much as 12% yesterday and another 4.5% today.  Even though the public health picture still looks bleak, we are starting to wrap our heads around how long the pandemic may continue.

Here are a few things I’m reading and my thoughts on what happens next.

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Obtaining a Mortgage as a Business Owner

How to Obtain a Mortgage as a Business Owner

If you’ve bought a house in the past, you are probably familiar with the underwriting process involved when obtaining a mortgage.  You might even have nightmares about the reams of paperwork you had to provide to your mortgage lender to get approved.

Being approved for a mortgage is not an easy process.  For business owners it’s even more complex.  Typically mortgage lenders provide pre-approvals based on some combination of your W-2 income history, pay stubs, or an offer letter from an employer.  Unfortunately for business owners, these sources may not show consistent income a lender could use in a standard approval.

So what do you do?  Recently I had Maggie Hopkins, a local Sacramento mortgage lender, on the podcast.  Since she shared so much valuable information on the episode (and because I love re-purposing content), I thought I’d summarize the important points on the blog this week.  If you own a business, here’s what you need to know about obtaining a mortgage.


 

The Typical Mortgage Underwriting Process

Like any bank, mortgage lenders want some assurances that they’re going to get their money back, plus interest, before giving any to you.  So, when you walk into your mortgage lender and ask for financing, they’re going to ask for your tax returns, pay stubs, credit reports, and any other documents that might be relevant.

If you’re an employee collecting a w-2 salary, lenders may be willing to assume that income will continue indefinitely.  They’ll also take your other debt into consideration, and use some type of debt to income ratio to determine how much they’re comfortable doling out.

If you don’t have a w-2 salary that doesn’t mean you can’t get a mortgage.  But it does likely mean that you can’t get a conventional mortgage, that meets the down payment and income requirements established by Fannie Mae and Freddie Mac.

It also means lenders will look at your other sources of income.  And for self-employment income, lenders historically use the average of your last two years.  Doing so helps them confirm that your business profits are not a short term “flash in the pan” that might disappear next month.

This can be less than convenient, since net profit is usually the only metric that matters.  Any type of fluctuation in bottom line profits in the last two years could impact your pre-approval amount or your eligibility entirely.  Funding a big expansion or other expenses that might crimp profits over a short period of time tend to work against you.  So do gray area personal expenses you might be running through your business: home office deductions, cell phone bills, etc.  Anything that depresses your income, while ordinarily “good” for tax reasons, may mean you’re not able to obtain as much financing as you’d like.

 

Other Mortgage Options for Business Owners

So what are your options if the last two years haven’t been stellar?  An obvious answer would be to wait it out.  Take a two year period where you cut expenses as much as possible in order to prove adequate self employment earnings.  Or simply grow revenues.  (Although I should add, from a business management standpoint, growing revenues is not always the answer, and can lead to more pain than gain).

Another option is to pursue what’s called a “bank statement loan”.  Whereas banks have been exceptionally rigid with their underwriting policies and standards since the mortgage crisis in 2009 (for good reason), they are starting to loosen more recently.  Some lenders are beginning offer mortgages based on the deposits to your business bank account – not your tax returns or pay stubs.

As Maggie shared with me, these are typically 5, 7, and 10 year adjustable rate mortgages (ARMs).  Which isn’t quite as appealing as a borrower in this low interest rate environment as a longer term fixed rate mortgage would be.  Nonetheless, it can be very helpful.  And you can always refinance later if your business income becomes more consistent over the few years after obtaining one.

 

Down Payments

Conventional mortgages require 20% down payments.  Coming in with less than amount isn’t a deal breaker, but it means one of two things:

  1. You need to obtain an FHA loan and private mortgage insurance
  2. You need another type of unconventional (non-conventional?) loan on less favorable terms

FHA loans can be extremely helpful.  You can put down as little as 3% since the FHA is guaranteeing the mortgage.  The downside is that you have to pay private mortgage insurance (PMI), which can be anywhere between 0.55% and 2.25% per year.  That’s added to the interest you’d pay on the loan anyway.

The alternative is to work outside the bounds of conventional loans.  Realistically this means letting your mortgage broker go to work for you.  Mortgage brokers can work with any number of different lenders, and should have a good understanding of which banks tend to offer the best terms for your situation.  While you don’t necessarily need to pay private mortgage insurance if you have less than 20% down, do expect to pay a higher interest rate.  Maggie also shared with me that while it’s possible to obtain a bank statement loan with less than 20% down, you’re probably not going to like the rate & other terms.

 

What to Make of Points, Rates, Closing Costs, and other Terms

Then there’s the question of points, rates, closing costs, and terms.  One of the biggest takeaways I got from Maggie was that mortgages are one big package deal.  Lenders try to ascertain your capacity and willingness to pay off the mortgage, and then extend an offer accordingly.  Better credit scores mean that you’ll get more favorable terms.  Negative marks on your credit history mean you’ll end up paying more.

From there it’s all negotiable.  You can squeeze your annual interest rate down by buying points & paying more up front.  Which could be a good idea if you’re certain you’ll stay in the house for the entirety of the loan.  But that may not be your best option.  At the end of the day the rate, closing costs, and term should all be aligned with your objectives for the property.  If it’s a flip, pick the loan with the lowest possible down payment and closing costs.  If it’s your forever house, scrutinize the rate.

At the end of the day, your mortgage broker’s job is find a lender to offer you a loan on the most favorable terms and the right structure.  There are a ton of moving parts in the mortgage world.  Just because you don’t have 20% down or two years of schedule C income doesn’t mean you can’t get into a house.  Even if you own a business that doesn’t produce consistently high self-employment income.

My Top 5 Year End Tax Planning Tips

My Top 5 Year End Tax Planning Tips

Happy holidays!

It’s now December, and if you blink hard enough (or drink enough egg nog) you’ll wake up & find yourself in January of a new year.  For many people, holiday office parties & Christmas shopping comes hand in hand with a few year end financial chores.

There are plenty of these financial “chores” you could occupy yourself with if you chose.  But since December 31st coincides with the end of the tax year, today’s post will cover my 5 favorite year end tax planning tips.  These are five of the most common year-end opportunities I see to reduce your long term tax liability.

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I Keep Hearing We're Nearing a Recession. Are We Nearing a Recession?

I Keep Hearing We’re Nearing a Recession. Are We Nearing a Recession?

There’s been more than a few news headlines recently claiming that we’re on the verge of an economic recession.  For many business owners and investors the word recession is a lot like Voldemort.  It’s so evil and scary that you’re not even supposed to say it.  “Recession” evokes fears of falling stock prices, unemployment, and scarcity.

So what exactly is a recession?  And should we treat them with the same respect that Harry Potter treats Lord Voldemort?

Recessions are technically two or more consecutive quarters where national gross domestic product contracts.  Gross domestic product (GDP) is sum of all the goods and services a country produces.  It’s the broadest and most common way to measure economic activity and the strength of the economy.  Growing GDP is a good sign, falling GDP is a bad sign.  This is what US GDP growth has looked like since 1930.  Lots of major swings between 1930 and 1950, and relatively steady since about 1985.  Note that by that time the US dollar was the world’s reserve currency, we were off the gold standard, and interest rates had started to stabilize after stagflation in the 1970s.

I Keep Hearing We're Nearing a Recession. Are We Nearing a Recession?

Now on to why you should care.  The more goods and services a country produces, the better off its citizens are financially.  There’s more wealth being created, more jobs available, and usually faster rising wages.  For businesses this means that your customers have more stable employment and more discretionary income to buy your products.

In a recession GDP contracts.  There’s less economic activity.  From a business’s perspective your customers have fewer jobs, lower wages, and less discretionary income.  Revenue dries up, and you may be forced to lay employees off yourself.  Times are tough.

From an investor’s perspective, recessions are tough on asset prices.  The value of your stock holdings, including index funds, depends on the market’s expectation of future cash flows & profitability.  Recessions are tough on cash flow, tough on profitability, and tough on stock prices.  Recessions often coincide with bear markets.

So where are we now?  Are we actually nearing a recession, or is the rhetoric we’re hearing on the news just propaganda?  I’m no economist, but I do have some background and stay informed as part of my day job.  Here’s my take on whether we’re nearing a recession.

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The Home Office Deduction 101: Simplified Method vs. Actual Expense Method

The Home Office Deduction 101: Simplified Method vs. Actual Expense Method

Even though we don’t currently prepare tax returns for clients at my financial planning firm, tax is a topic that comes up a lot.  Many of our clients own businesses, and most of them share two opinions:

Alongside that there are several tax related questions that come up fairly frequently with our clients.  One of them is the home office deduction.  How can you take it?  Are you even eligible?  What can do to take a larger home office deduction this year?  What are your options?

Whereas employees and small business owners alike were eligible to take the deduction prior to 2018, the Tax Cut & Jobs Act eliminated home office expenses as a miscellaneous itemized deduction.  That means that rather than deducting home office expenses on Schedule A as an itemized deduction, they’re now claimed on Schedule C.  And since Schedule C only contains information related to self-employment, the tax law change essentially means that employees are no longer eligible to take the deduction.

For business owners still eligible to take the home office deduction, there are two options for calculating the amount: the simplified method and the actual expense method.  This post will cover both in detail, and explain what you need to know to take the deduction yourself.

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A Review of the CalSavers Retirement Savings Program

A Review of the CalSavers Retirement Savings Program

If you’ve been following the California legislative process at all, or if you own a business that employs people in California, you may have heard of the CalSavers Retirement Savings Program.  In 2016, Governor Jerry Brown signed Bill 1234, requiring development of a workplace retirement savings program for private sector workers without access to one.  The resulting program is known as CalSavers.

Basically, the program forces employers with more than 5 employees to defer a portion of their employees’ paychecks into a state run Roth IRA.  These contributions are invested in default target date retirement funds, unless the employee directs their investments otherwise.  Employees may also opt out entirely, if they choose.

The benefit of such a program is easy access to a retirement savings account.  Employees could contribute to one on their own, of course, but that would require opening an account at a brokerage firm & making investment decisions.  CalSavers greases the wheels by providing a “done for you” program that employees are defaulted into.

The positive spin here is that the program will certainly result in more retirement savings for many thousands of employees.  The negative side of the story comes from the business community.  Businesses without retirement plans will be forced to take the time to open a plan, enroll their employees, and deposit their contributions.

CalSavers isn’t at all unprecedented.  At this point 21 states have enacted similar legislation.  The law is taking a good amount of “heat” though.  Several industry groups are suing the state treasurer in an attempt to derail the rule.  Some plaintiffs don’t care for the state government telling them what to do, while others in the financial industry probably see the program as a competitive threat.

Whatever your take on the matter, businesses will be required to comply beginning in June of 2020 as the law stands today.  This post will provide a quick overview of the program, including its benefits and shortcomings.

 

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What I Learned at XYPN Live 2019

What I Learned at XYPN Live 2019

Today’s post is a follow up to last week’s post.  There are a few conferences I try to fit into my travel schedule every year.  XYPN Live is one of them.  XYPN is an acronym for the “XY Planning Network” – it’s a professional organization for financial planners who work with generations X and Y.  (Unlike much of the industry).

This year the conference was held in St. Louis for the second year in a row.  Attendees are mostly all financial planners, with a few reporters, CPAs, and tech providers sprinkled in.  I make it a point to attend this conference for a few different reasons:

  • This is the only time throughout the year that my study group meets in person (I have a weekly study group)
  • Many of the XYPN members who attend have firms similar to mine
  • Many of the attendees are exploring new, innovative service models and ways to provide value to their clients.

For me, XYPN Live is an opportunity to connect with my study group, reconnect with friends I don’t otherwise see or talk to, and pick up bits of wisdom from other professionals in the industry.

Attending these conferences takes some time away from my family, my clients, and the firm.  But because the learnings ultimately benefit all three, I find a lot of value in going.

Here’s what I learned at XYPN Live this year.

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