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The Employee Retention Tax Credit (ERTC) is a valuable tax break that was extended and modified by the American Rescue Plan Act (ARPA), enacted in March of 2021. Here’s a rundown of the rules.

Background

Back in March of 2020, Congress originally enacted the ERTC in the CARES Act to encourage employers to hire and retain employees during the pandemic. At that time, the ERTC applied to wages paid after March 12, 2020, and before January 1, 2021. However, Congress later modified and extended the ERTC to apply to wages paid before July 1, 2021.

The ARPA again extended and modified the ERTC to apply to wages paid after June 30, 2021, and before January 1, 2022. Thus, an eligible employer can claim the refundable ERTC against “applicable employment taxes” equal to 70% of the qualified wages it pays to employees in the third and fourth quarters of 2021. Except as discussed below, qualified wages are generally limited to $10,000 per employee per 2021 calendar quarter. Thus, the maximum ERTC amount available is generally $7,000 per employee per calendar quarter or $28,000 per employee in 2021.

For purposes of the ERTC, a qualified employer is eligible if it experiences a significant decline in gross receipts or a full or partial suspension of business due to a government order. Employers with up to 500 full-time employees can claim the credit without regard to whether the employees for whom the credit is claimed actually perform services. But, except as explained below, employers with more than 500 full-time employees can only claim the ERTC with respect to employees that don’t perform services.

Employers who got a Payroll Protection Program loan in 2020 can still claim the ERTC. But the same wages can’t be used both for seeking loan forgiveness or satisfying conditions of other COVID relief programs (such as the Restaurant Revitalization Fund program) in calculating the ERTC.

Modifications

Beginning in the third quarter of 2021, the following modifications apply to the ERTC:

Applicable employment taxes are the Medicare hospital taxes (1.45% of the wages) and the Railroad Retirement payroll tax that’s attributable to the Medicare hospital tax rate. For the first and second quarters of 2021, “applicable employment taxes” were defined as the employer’s share of Social Security or FICA tax (6.2% of the wages) and the Railroad Retirement Tax Act payroll tax that was attributable to the Social Security tax rate.
Recovery startup businesses are qualified employers. These are generally defined as businesses that began operating after February 15, 2020, and that meet certain gross receipts requirements. These recovery startup businesses will be eligible for an increased maximum credit of $50,000 per quarter, even if they haven’t experienced a significant decline in gross receipts or been subject to a full or partial suspension under a government order.
A “severely financially distressed” employer that has suffered a decline in quarterly gross receipts of 90% or more compared to the same quarter in 2019 can treat wages (up to $10,000) paid during those quarters as qualified wages. This allows an employer with over 500 employees under severe financial distress to treat those wages as qualified wages whether or not employees actually provide services.
The statute of limitations for assessments relating to the ERTC won’t expire until five years after the date the original return claiming the credit is filed (or treated as filed).

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“Diversification is the only free lunch in investing,” said Nobel Prize laureate Harry Markowitz. Why that is, and what it means to the average investor, needs some demystifying.

Proper diversification refers to having assets that move in opposite directions at the same time. In investing and statistics jargon, this is called ‘correlation.’ If one asset zigs, the other zags. For example, during the Covid drawdown in the first quarter of 2020, the S&P 500 fell 33.69% from February 13th till March 23rd. In that period, 20‐year treasuries (as measured by the iShares 20+ Year Treasury ETF) rose by 15.51%.

It’s analogous to the hitter in baseball that has a batting average of .315 but can go 4 for 5 in any one game. Nevertheless, over an entire season, he will always remain close to his average. Similarly, if you have many investments, you will earn their average over longer periods of time.

Many investors think that owning a few, or even many, stocks means you’ve assembled a diversified portfolio. The problem with this premise is that many stocks have a very high correlation (read: move in tandem). You would expect that stocks in the same sectors have a high correlation, but in today’s environment, the entire stock market moves in the same direction. For example, Target (ticker: TGT) has a correlation of .91 with Facebook (ticker: FB), which means they move in the same direction at a very high rate. What does a national retail chain have in common with the social media juggernaut? Only the fact that the market started moving in tandem.

In order to diversify, you need to incorporate many asset classes into your portfolio, such as equities, fixed income, real estate, precious metals and commodities. It’s also vital to have diversification in regions. Even within any one region, different asset classes can move in the same direction.

There is one type of false diversification that some investors think is helpful, and that is using more than one advisor. One of the biggest reasons one hires an advisor is to relieve them from managing the duties of their assets. But when you have more than one advisor, you’ll need to spend time and energy managing them as opposed to the assets.

Additionally, when it comes to actual management, multiple advisors’ work may be redundant. This does not add any diversification, plus, things can get hairy if they contradict each other. For example, to lock in a loss to offset gains, an investor can sell a position that is at a loss. This is known as tax‐loss harvesting. This only works if they don’t buy it back within 30 days. But if there are two advisors, the second one may purchase it in that 30-day time frame, causing a wash sale. This results in a tax bill, plus a headache. Having one quarterback managing and overlooking the entire diversified portfolio is probably the best way to invest for most.

Are you properly diversified? Reach out to us at info@equinum.com for a knowledgeable and professional opinion.

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As we continue to come out of the COVID-19 pandemic, you may be traveling again for business. Under tax law, there are a number of rules for deducting the cost of your out-of-town business travel within the United States. These rules apply if the business conducted out of town reasonably requires an overnight stay.

Note that under the Tax Cuts and Jobs Act, employees can’t deduct their unreimbursed travel expenses through 2025 on their own tax returns. That’s because unreimbursed employee business expenses are “miscellaneous itemized deductions” that aren’t deductible through 2025.

However, self-employed individuals can continue to deduct business expenses, including away-from-home travel expenses.

Here are some of the rules that come into play.

Transportation and meals

The actual costs of travel (for example, plane fare and cabs to the airport) are deductible for out-of-town business trips. You’re also allowed to deduct the cost of meals and lodging. Your meals are deductible even if they’re not connected to a business conversation or other business function. The Consolidated Appropriations Act includes a provision that removes the 50% limit on deducting eligible business meals for 2021 and 2022. The law allows a 100% deduction for food and beverages provided by a restaurant. Takeout and delivery meals provided by a restaurant are also fully deductible.

Keep in mind that no deduction is allowed for meal or lodging expenses that are “lavish or extravagant,” a term that’s been interpreted to mean “unreasonable.”

Personal entertainment costs on the trip aren’t deductible, but business-related costs such as those for dry cleaning, phone calls and computer rentals can be written off.

Combining business and pleasure

Some allocations may be required if the trip is a combined business/pleasure trip, for example, if you fly to a location for five days of business meetings and stay on for an additional period of vacation. Only the cost of meals, lodging, etc., incurred for the business days are deductible — not those incurred for the personal vacation days.

On the other hand, with respect to the cost of the travel itself (plane fare, etc.), if the trip is “primarily” business, the travel cost can be deducted in its entirety and no allocation is required. Conversely, if the trip is primarily personal, none of the travel costs are deductible. An important factor in determining if the trip is primarily business or personal is the amount of time spent on each (although this isn’’t the sole factor).

If the trip doesn’t involve the actual conduct of business but is for the purpose of attending a convention, seminar, etc., the IRS may check the nature of the meetings carefully to make sure they aren’t vacations in disguise. Retain all material helpful in establishing the business or professional nature of this travel.

Other expenses

The rules for deducting the costs of a spouse who accompanies you on a business trip are very restrictive. No deduction is allowed unless the spouse is an employee of you or your company, and the spouse’s travel is also for a business purpose.

Finally, note that personal expenses you incur at home as a result of taking the trip aren’t deductible. For example, the cost of boarding a pet while you’re away isn’t deductible. Contact us if you have questions about your small business deductions.

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Estate planning isn’t just about what happens to your assets after you die. It’s also about protecting yourself and your loved ones. This includes having a plan for making critical medical decisions in the event you’re unable to make them yourself. And, as with other aspects of your estate plan, the time to act is now, while you’re healthy. If an illness or injury renders you unconscious or otherwise incapacitated, it may be too late.

To ensure that your wishes are carried out, and that your family is spared the burden of guessing — or arguing over — what you would decide, put those wishes in writing. Generally, that means executing two documents: a living will and a health care power of attorney (HCPA).

Clarifying the terminology

Unfortunately, these documents are known by many different names, which can lead to confusion. Living wills are sometimes called “advance directives,” “health care directives” or “directives to physicians.” And HCPAs may also be known as “durable medical powers of attorney,” “durable powers of attorney for health care” or “health care proxies.” In some states, “advance directive” refers to a single document that contains both a living will and an HCPA.

For the sake of convenience, we’ll use the terms “living will” and “HCPA.” Regardless of terminology, these documents serve two important purposes: 1) to guide health care providers in the event you become terminally ill or permanently unconscious, and 2) to appoint someone you trust to make medical decisions on your behalf.

Living will

A living will expresses your preferences for the use of life-sustaining medical procedures, such as artificial feeding and breathing, surgery, invasive diagnostic tests, and pain medication. It also specifies the situations in which these procedures should be used or withheld.

Living wills often contain a do-not-resuscitate order (DNR), which instructs medical personnel to not perform CPR in the event of cardiac arrest.

HCPA

An HCPA authorizes a surrogate — your spouse, child or another trusted representative — to make medical decisions or consent to medical treatment on your behalf when you’re unable to do so. It’s broader than a living will, which generally is limited to end-of-life situations, although there may be some overlap.

An HCPA might authorize your surrogate to make medical decisions that don’t conflict with your living will, including consenting to medical treatment, placing you in a nursing home or other facility, or even implementing or discontinuing life-prolonging measures.

Document storage and upkeep

No matter how carefully you plan, living wills and HCPAs are effective only if your documents are readily accessible and health care providers honor them. Store your documents in a safe place that’s always accessible and be sure your loved ones know where to find them.

Also, keep in mind that health care providers may be reluctant to honor documents that are several years old, so it’s a good idea to sign new ones periodically. Contact us for additional information.

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Timing counts in financial reporting. Under the accrual method of accounting, the end of the accounting period serves as a strict “cutoff” for recognizing revenue and expenses.

However, during the COVID-19 pandemic, managers may be tempted to show earnings or reduce losses. As a result, they may extend revenue cutoffs beyond the end of the period or delay reporting expenses until the next period. Here’s an overview of the rules that apply to revenue and expense recognition under U.S. Generally Accepted Accounting Principles (GAAP).

General principle

Companies that follow GAAP recognize revenue when the earnings process is complete, and the rights of ownership have passed from seller to buyer. Rights of ownership include possession of an unrestricted right to use the property, title, assumption of liabilities, transferability of ownership, insurance coverage and risk of loss.

In addition, under accrual-based accounting methods, revenue and expenses are matched in the reporting periods that they’re earned and incurred. The exchange of cash doesn’t necessarily drive the recognition of revenue and expenses under GAAP. The rules may be less clear for certain services and contract sales, tempting some companies to play timing games to artificially boost financial results.

Rules for long-term contracts

The rules regarding cutoffs recently changed for companies that enter into long-term contracts. Under Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, revenue should be recognized “to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for the goods or services.”

The guidance requires management to make judgment calls about identifying performance obligations (promises) in contracts, allocating transaction prices to these promises and estimating variable consideration. These judgments could be susceptible to management bias or manipulation.

In turn, the risk of misstatement and the need for expanded disclosures will bring increased attention to revenue recognition practices. So, if your business is affected by the updated guidance, expect your auditors to ask more questions about cutoff policies and to perform additional audit procedures to test compliance with GAAP. For instance, they’ll likely review a larger sample of customer contracts and invoices than in previous periods to ensure you’re accurately applying the cutoff rules.

For more information

Contact us if you need help understanding the rules on when to record revenue and expenses. We can help you comply with the current guidance and minimize audit adjustments.

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Among all the positive traits effective leaders possess, research points to one attribute that is more reliable in predicting overall business success than intelligence, toughness, determination and vision – qualities traditionally associated with leadership: emotional intelligence.

Emotional intelligence (EI) is defined as the ability to understand and manage your own emotions, as well as recognize and influence the emotions of those around you. The term was first coined in a 1990 research paper by psychology professors John Mayer and Peter Salovey. It was later popularized in the New York Times bestselling book, Emotional Intelligence: Why It Can Matter More Than IQ, by psychologist Daniel Goleman.

Dr. Goleman highlighted the importance of emotional intelligence in leadership, telling the Harvard Business Review, “The most effective leaders are all alike in one crucial way: They all have a high degree of what has come to be known as emotional intelligence. It’s not that IQ and technical skills are irrelevant. They do matter, but…they are the entry-level requirements for executive positions.” In his research of nearly 200 large companies, Goleman found that the most effective leaders were those with a high degree of emotional intelligence. A person can have the best training, a brilliant mind and an endless supply of great ideas, but without developing his EI capabilities, he will still struggle to be a great leader.

Over the years, emotional intelligence has grown into a must-have skill for businesses. According to a survey by CareerBuilder.com, 71% of employers surveyed said they value EI over IQ, and report that employees with high emotional intelligence are more likely to stay calm under pressure, resolve conflict effectively and respond to co-workers with empathy.

The good news is that emotional intelligence can be learned and improved. In fact, the four components of emotional intelligence are not necessarily earned through life experience, but proactively learned and developed. These components can be studied and practiced with self-paced online learning tools or at off-site workshops.

Self-Awareness: Self-awareness is the ability to recognize and understand your own emotions, strengths, weaknesses, needs and drives. Self-awareness is a critical part of emotional intelligence, and it goes beyond just recognizing these traits. It’s also about being aware of how your actions, moods and emotions can have an effect on other people. Self-aware people are honest with themselves and others. They are comfortable talking about their limitations and they often demonstrate a thirst for constructive criticism. It requires a great deal of introspection and the ability to thoughtfully consider feedback from others.

Self-Management: Those with strong self-management skills have the ability to manage their emotions, particularly in stressful situations, and maintain a positive outlook despite life’s setbacks. Leaders who lack self- management often react poorly to difficult situations and have a harder time keeping their impulses and emotions under control. A person with a high degree of self-management will find ways to control his emotional impulses and channel them in useful ways. People with strong self-management skills also tend to be flexible and adapt well to change.

Social Awareness: Social awareness in the workplace refers to the ability to recognize the feelings and emotions of others, while understanding the dynamics at play within one’s organization. Leaders who excel in social awareness usually have a great deal of empathy. They strive to understand the feelings and perspectives of others, which enables them to communicate and collaborate more effectively. Being empathetic – or having the ability to understand how others are feeling – is critical to emotional intelligence. Today, empathy is more important than ever due to the increasing use of teams in the workplace, as well as the growing need to retain talent.

Relationship Management: Relationship management skills include the ability to influence and mentor others, as well as resolve conflict effectively. Managing one’s social relationships at work often builds on the previous components of EI. People tend to be more effective at managing relationships when they can understand and control their own emotions while empathizing with the feelings of others. Relationship management is about building bonds with people, but it is also about addressing and managing conflict. It is important to properly address issues as they arise, because keeping your employees happy often means having to navigate tough and honest conversations.

The truth is that no one is born a leader. To develop into the leaders we want to become, we need to consciously work to improve ourselves. While a business leader might excel at their job on a technical level, if he or she cannot communicate or work with others effectively, those technical skills will get overlooked. By mastering emotional intelligence, you can continue to advance your organization and your career. Relationships with employees, vendors, customers and others will undoubtedly improve when led by a leader with highly developed emotional intelligence.

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Working capital equals the difference between current assets and current liabilities. Organizations need a certain amount of working capital to run their operations smoothly. The optimal (or “target”) amount of working capital depends on the nature of operations and the industry. Inefficient working capital management can hinder growth and performance.

Benchmarks

The term “liquidity” refers to how quickly an item can be converted to cash. In general, receivables are considered more liquid than inventory. Working capital is often evaluated using the following liquidity metrics:

Current ratio. This is computed by dividing current assets by current liabilities. A current ratio of at least 1.0 means that the company has enough current assets on hand to cover liabilities that are due within 12 months.

Quick (or acid-test) ratio. This is a more conservative liquidity benchmark. It typically excludes prepaid assets and inventory from the calculation.

An alternative perspective on working capital is to compare it to total assets and annual revenues. From this angle, working capital becomes a measure of operating efficiency. Excessive amounts of cash tied up in working capital detract from other spending options, such as expanding to new markets, buying equipment and paying down debt.

Best practices

High liquidity generally equates with low financial risk. However, you can have too much of a good thing. If working capital is trending upward from year to year — or it’s significantly higher than your competitors — it may be time to take proactive measures to speed up cash inflows and delay cash outflows.

Lean operations require taking a closer look at each component of working capital and implementing these best practices:

1. Put cash to good use. Excessive cash balances encourage management to become complacent about working capital. If your organization has plenty of money in its checkbook, you might be less hungry to collect receivables and less disciplined when ordering inventory.

2. Expedite collections. Organizations that sell on credit effectively finance their customers’ operations. Stale receivables — typically any balance over 45 or 60 days outstanding, depending on the industry — are a red flag of inefficient working capital management.

Getting a handle on receivables starts by evaluating which items should be written off as bad debts. Then viable balances need to be “talked in the door” as soon as possible. Enhanced collections efforts might include early bird discounts, electronic invoices and collections-based sales compensation programs.

3. Carry less inventory. Inventory represents a huge investment for manufacturers, distributors, retailers and contractors. It’s also difficult to track and value. Enhanced forecasting and data sharing with suppliers can reduce the need for safety stock and result in smarter ordering practices. Computerized technology — such as barcodes, radio frequency identification and enterprise resource planning tools — also improve inventory tracking and ordering practices.

4. Postpone payments. Credit terms should be extended as long as possible — without losing out on early bird discounts. If you can stretch your organization’s average days in payables from, say, 45 to 60 days, it trains vendors and suppliers to accept the new terms, particularly if you’re a predictable, reliable payor.

Prioritize working capital

Some organizations are so focused on the income statement, including revenue and profits, that they lose sight of the strategic significance of the balance sheet — especially working capital accounts. We can benchmark your organization’s liquidity and asset efficiency over time and against competitors. If necessary, we also can help implement strategies to improve your performance, without exposing you to unnecessary risk.

Eligible Businesses: Claim the Employee Retention Tax Credit

Diversification Demystified

Traveling for Business Again? What Can You Deduct?

Make Health Care Decisions While You’re Healthy

Follow the Cutoff Rules for Revenue and Expenses

Emotional Intelligence in the Workplace

Hit or Miss: Is Your Working Capital on-Target?