How Financially Literate Are You? 3 Things You Should Know About Your Money

Most of us received little guidance or instruction on how to handle money when we were growing up. That’s OK — we can learn now, a little bit at a time. Let’s start with the basics.

How do most of us learn how to use our money wisely and well? When we’re growing up, we’re given special instruction in important subjects — swimming, driving, sex — to arm us with info and keep us from harm.

Yet when it comes to managing our money — an activity that every one of us needs to do, every day — we receive surprisingly little preparation. We’re not taught much about it in school, because education systems leave it to us to learn from our families and friends. However, those people often don’t fill in the gaps because money can be such a loaded or taboo topic.

Natalie Torres-Haddad, who grew up in southern California, saw many people around her struggling with debt and financial instability. She was determined to be the exception, and she purchased her first rental property in her early 20s and earned an MPA in Finance & International Business. In the process, however, she became buried in debt. Only by teaching herself the basics of money — basics that she’d never learned — was she able to steady herself and her finances.

Today she leads workshops and sessions to prevent others from falling into the money pit. (She’s also the author of the self-published Financially Savvy in 20 Minutes ). She’s found that even among the college-educated people she meets, “the majority feel confused and overwhelmed about balancing their income and expenses,” she says. The stats show they’re not alone. A 2015 Ohio State University study reported nearly 70 percent of college graduates in the US say they don’t feel equipped to manage money and deal with their debt.

Not only must we get up to speed on the basics, we also need to start having honest conversations with each other about money, says Torres-Haddad. In the same way we’d tell family and friends that we’re cutting out refined sugar from our diets or practicing yoga to increase our flexibility, we should be open with them about the steps we’re taking to boost our financial health. That way, we can get advice and support. This transparency, she adds, can also make us less susceptible to peer pressure-related spending. How many of us have agreed to a pricey meal or weekend trip because we didn’t want to come clean about our money concerns?

Becoming financially literate does not require a huge time investment. Torres-Haddad believes we can start by dedicating 15 – 20 minutes a day to developing our skills and knowledge by learning new terms and resources. Just like attaining literacy in a foreign language, she says, “it’s an ongoing education.” Here are three things you need to know about your money.

1. Know How Much Money You’re Bringing in Every Month vs. How Much You’re Spending

Most of us can rattle off our salaries in our sleep, but could you do the same for your monthly after-tax income and where you’re spending your money every month? If you can’t, that’s normal. But now is the time to learn your actual take-home pay and your actual expenses (and not just ballpark figures or estimates).

For your income, look at your physical or online pay stubs, and start keeping a record of the after-tax amounts. If you’re a salaried employee, that number should be fairly steady; if you’re not, those numbers will vary.

For your monthly expenses, Torres-Haddad suggests writing down — whether it’s in a physical or online notebook — every single daily purchase (coffee, take-out, Uber, online shopping, etc) you make and every single ongoing payment you make through autopay or credit cards (Netflix, gym membership, car insurance, utilities, etc.).

If you’ve never done this before, you may find this uncomfortable — even painful — but it will force you to face up to your spending habits. It will also make these purchases visible. Often, our regular outlays (such as Netflix, Hulu, etc.) can go unnoticed or unquestioned, and our daily spends — especially if we pay by debit card so the funds are instantly drawn from our bank accounts — can go forgotten. Torres-Haddad calls the latter “runaway spending” — “when the little things that you thought cost only a few dollars actually cost much more” in the long run. Take a daily $5 green smoothie. By making them at home, you could save yourself a few hundred dollars in a month.

After you have a fundamental understanding of income and expenses, you can download an app to help you track these categories; see your bank account, credit-card and loan balances; and organize your purchases into buckets so you can identify areas where you might cut back. Two free apps to try are Mint or Charlie, says Torres-Haddad. But, she cautions, apps can be a little “out of sight, out of mind,” meaning if you need extra help to be aware of your spending, stick with the pen-and-pad (or fingers-and-keyboard) method a while longer.

2. Know Your FICO Score and Your Other Credit Scores

While you don’t need to have a good credit score to be financially literate, you must know what it is. ( Note: Most of the information in this section applies to people living in the US.) In the US, FICO was the first company to offer a three-digit credit-risk score for lenders to use when deciding whether or not to approve a loan or line of credit, a credit limit, and an interest rate. There are three other national credit reporting bureaus — Experian, Equifax and Transunion — which also keep track of all your loans (student, auto, personal, etc.) and your balances and histories for all your credit cards (whether issued by banks, stores or businesses).

However, the FICO score is the one most frequently used when you apply for credit cards, mortgages and most types of loans; rent an apartment; or sign up for utilities. FICO scores range from 300 to 850; 670 and up is seen as a good score and 800 and up is excellent. While the FICO score is calculated with a proprietary algorithm, the primary factors that go into it are your repayment history (do you pay your credit-card bills on time? how late are you?), how much debt you’re carrying on cards and loans, how long you’ve successfully held a credit card or loan for; and whether you’ve managed to hold a mix of different kinds of credit.

Most banks and credit cards offer free access to your FICO score on their mobile apps and websites ( here’s a list of the ones that do). If you don’t use one of these companies, you can also find out how to access your score on FICO’s helpful FAQ, including a chart showing where your score falls between “Poor” and “Exceptional.”

Besides checking your FICO score every year, do an annual check of the reports issued by Experian, Equifax and Transunion. This is so you can verify that they’re correct, make sure no one has opened up a line of credit in your name, and see where you might improve. You are entitled to a free copy of a credit report from each bureau once a year. Beware: Many sites will charge you a fee, so use the federally approved and secure Annual Credit Report site.

If it’s your first time checking or you’re about to make a big purchase (such as a car or a home), Torres-Haddad suggests getting all three reports at once. After that, she recommends spacing them out throughout the year. That way, you can quickly catch any errors, fraud, identity theft or any other actions that could hurt your credit history. Mark your calendar so you know when you can request your next free credit report.

3. Know How Much Credit Card Debt You’re Carrying

Knowing how much credit-card debt you’re carrying — and how quickly it’s increasing due to interest — is critical to your financial literacy. Make a list (on paper or on a computer) of each of your credit cards, their current balances, and their current interest rate. Then, put them in order from highest interest rate to lowest.

In general, says Torres-Haddad, this should be how you should prioritize paying them off, paying as much as you can towards the card with the highest interest rate while paying the minimum on the other cards. Called the “ debt-snowball method,” this was popularized by money expert Dave Ramsey.

If you have any cards that offered a 0% APR as a promotion when you signed up, mark down the date on which the promotional rate expires because that’s when you can expect your debt to accumulate at a high interest rate (20% or more). Try to budget your monthly payments so that this card will have little to no balance when that expiration date arrives.

Believe it or not, having a credit card can be a great thing for a person’s FICO and credit scores — if you use it responsibly. Of course, carrying no debt on your cards is best. Otherwise, Torres-Haddad recommends using no more than 30 percent of your available credit limit. So if you have two credit cards with limits of $6K apiece, totalling $12K in available credit, make sure the total balances you’re carrying do not exceed $4K.

If you’ve managed to pay off a credit card, congratulations. But while you may be tempted to close it, Torres-Haddad advises against it. Why? Closing the account will shrink your total amount of available credit and cause your credit score to dip. Instead, delete the card number from any online shopping accounts, cancel any auto-pays billed to it, and freeze the card in ice. It may sound silly but it means that if you want to use it, you’ll be forced to wait for it to defrost — and forced to take a little time to think about your purchase.

When choosing a new credit card, look for ones that offer incentives — such as travel points or cash back — which could help you and your finances. Torres-Haddad recommends going to nerdwallet.com and bankrate.com to compare credit card offers.

Obviously, these three points represent just a small part of financial literacy. That’s why Torres-Haddad urges people to be patient and to learn gradually. Two books she recommends are Napoleon Hill’s Think and Grow Rich!  and Robert T. Kiyosaki’s Rich Dad, Poor Dad. For those who like to get information through listening, she suggests the “Popcorn Finance” and “Her Dinero Matters” podcasts.

When you can, supplement your research with an in-person workshop, adds Torres-Haddad. “Even going to one financial literacy workshop can have a life-changing effect,” she says. A good time to find free workshops is April, which is Financial Literacy Month in the US. One of the best investments you can make in your life is to educate yourself about money, says Torres-Haddad. “It can really give you a lot of peace of mind.”

By: Erin McReynolds

Source: How Financially Literate Are You? 3 Things You Should Know About Your Money

.

Related Contents:

What is Personal Finance

Creating a Personal Financial Plan

Financial Planning And Goal Setting

The Importance of Financial Education

How we compete : what companies around the world are doing to make it in today’s global economy

10 Best Personal-Finance Tools to Better Manage Your Money

High schools are beginning to require personal finance courses

Financial Planning Curriculum Framework

Can The Best Financial Tips Fit On An Index Card

Managed care: the US experience

America’s 25 Most Fascinating Entrepreneurs

Personal Computers; Managing Your Money

Credit Karma raises $30M for personal finance tools

Top PFM (personal financial management) companies

Bitcoin Beach: The Cryptocurrency Experiment In El Salvador’s El Zonte

Last week, El Salvador’s legislature voted to become the first country in the world to adopt Bitcoin as legal tender. While the U.S. dollar will still be El Salvador’s official currency, all businesses in the country will have to start accepting Bitcoin barring extenuating circumstances (like lack of technological resources), and citizens will be able to pay their taxes and debts with the cryptocurrency.

The government is hoping that this futuristic economic policy will attract investment from cryptocurrency businesses, provide transformative financial resources for the 70 percent of El Salvadorans who are unbanked, and facilitate remittances, which amount to about 20 percent of the country’s gross domestic product. And, true to the madcap spirit of the Bitcoin community, El Salvador’s President Nayib Bukele has already directed a state-owned geothermal electric firm to start constructing Bitcoin mining facilities that will be powered by heat from the country’s volcanoes.

At the same time, critics have pointed out that the plan is very light on details and that Bitcoin is notoriously difficult to use as a day-to-day currency partly due to its volatility. In addition, there’s a good chance that a large swath of businesses in the country won’t even be able to feasibly accept the cryptocurrency; El Salvador has lowest rates of internet penetration in Latin America. Bukele, however, has been pointing to a small Salvadoran beach town called El Zonte where residents have been using Bitcoin for nearly two years as evidence that the cryptocurrency could help power the economy nationwide.

El Zonte is a village on the Pacific coast that has a population of about 3,000 people and is popular for surfing and fishing. While a beach town might sound affluent, El Zonte is not: According to Reuters, “El Zonte is visibly poor, with dirt roads and a faulty drainage system,” In 2019, an anonymous donor in the U.S. reportedly began sending Bitcoin to nonprofits in the area with the aim of finding ways to build a sustainable cryptocurrency ecosystem in the community.

Then nonprofit workers in El Zonte, in consultation with the donor, launched Bitcoin Beach, an initiative that injected the cryptocurrency into the local economy, set people up with digital wallets, and helped businesses set up systems to accept Bitcoin payments. Residents use a Venmo-like app payment system for exchanging Bitcoin, which was developed by a tech company in California called Galoy Money. Using the app, people can see which businesses accept Bitcoin and look one another up by username.

“This was just the perfect laboratory,” said Chris Hunter, co-founder of Galoy, of El Zonte. Hunter says El Zonte was a prime location for test-driving a Bitcoin payment system because of the lack of regulatory and tax burdens, the fact that most merchants and people don’t have credit cards, and dollarization of El Salvador’s economy. (El Salvador is one of around a dozen countries and territories that use the U.S. dollar as their official currency.)

He admits, though, that trying to get cryptocurrency systems up and running for an entire country is going to be exponentially more difficult than doing so for a 3,000-person village, and expressed skepticism that the government will meet its goal of getting the infrastructure in place by early September. “To support millions of people not just holding Bitcoin but spending it too, it’s certainly technically feasible. But to figure that out in 90 days is a pretty tight timeline,” Hunter said.

Although there has been some success in integrating Bitcoin into El Zonte’s economy—about 90 percent of families in the town have made a crypto transaction, according to Bitcoin Beach, to pay for things like groceries, utilities, and medical care—the project has not been without its obstacles. Reports indicate that some residents have struggled to access the payment system because of limited data plans and lack of access to more advanced smartphones.

Hunter claims that most people in the town seem to have lower-end Android phones that can support Bitcoin transactions, though he admits developers did run into some issues with getting the lower-resolution cameras on the devices to detect QR codes at local businesses. He also said that the local cell network in El Zonte is good enough for transactions.

But the reasons why crypto investors were drawn to El Zonte do not hold true throughout the country. Only 45 percent of the population in El Salvador has internet access.  It remains to be seen how exactly the national government thinks it will improve connectivity, particularly in rural areas, and get powerful enough devices into peoples’ hands to support a bitcoin economy. Bukele has floated the idea of building a network of satellites to improve coverage, but that obviously would take quite a while to implement.

Volatility remains a concern as well. In May, Bitcoin prices took a 30 percent dive after China implemented new digital currency restrictions and Tesla announced that it would no longer be accepting the cryptocurrency as payment. Around that time, Hunter says there was a corresponding decrease in the number of Bitcoin transactions in El Zonte. By all appearances, people were waiting for the value to go up again before using it.

Steve Hanke, professor of applied economics at Johns Hopkins University and director of the Cato institute’s Troubled Currencies Project, worries that average consumers and business owners won’t want to constantly engage in this sort of speculation when deciding whether to use their money. “Businesses tend to unload Bitcoin as fast as they can because of the fluctuating exchange rate. If you receive it in the morning, it could easily be down 5 or 10 percent by the close of business,” said Hanke. “Are you running a business in which you’re speculating in Bitcoin, or are you running a business where you’re selling clothes or shoes?”

Bukele has said that the government will set up a $150 million fund so that people can immediately cash out their Bitcoin for dollars, thus shielding them from some of the volatility. The details of this part of the plan are also scant, however, and Hanke notes that there’s a danger in El Salvador establishing itself as a country with permissive financial regulations that’s willing to exchange dollars for Bitcoin at any time.

For criminals who are in possession of large amounts of Bitcoin, El Salvador could be an attractive place to cash out. In the worst-case scenario, Hanke says, “You could essentially have Bitcoin holders who want greenbacks that are in a position to basically vacuum up all of the greenbacks that exist in El Salvador, and the place would collapse without it.”

By Aaron Mak

Source: Bitcoin Beach: The cryptocurrency experiment in El Salvador’s El Zonte

.

More Contents:

How To Think Though Hard Financial Choices And Make Better Money Decisions

https://i1.wp.com/onlinemarketingscoops.com/wp-content/uploads/2021/05/shutterstock_710867164-648x364-c-default.jpg?resize=924%2C519&ssl=1

When you first learn to manage your money, you will likely feel like you are drowning in a sea of strict rules to follow: Pay off your debt, create a budget, live within your means, save more, start investing… the list goes on.

The nice thing about being in this stage, however, is that it’s pretty easy to find objectively correct answers to the questions you likely have at this point.

There’s one specific answer if you ask “what is a Roth IRA and what are the income limits if I want to contribute.” There’s a systematic way to figure out the answers to questions like, “how can I save up X amount of dollars in Y amount of time?”

But eventually, you will find an inflection point. It lies just beyond basic financial stability; it’s everything that comes after you develop sufficient financial resources.

At this point, you’ll face a new challenge: feeling confident about your decisions when you have multiple choices you could make with your money, and none of them are objectively better than another.

The Challenges Of Managing Your Money (Once You Have More To Manage)

Before you reach a certain level of income, you don’t really have a lot of agency over how you use your money; it has to go to bills, expenses, basic needs and savings. You don’t have a lot of options.

But at some point, your personal finances can no longer be managed on a spreadsheet alone. You’ll begin to have more freedom and flexibility, and therefore more choice.

When there are multiple avenues you can afford to take, determining which of your multiple choices starts getting hard to do.

One way to make a hard decision is to evaluate the objective facts around the options. This is where numbers do matter and can sometimes point us to very clear answers (like if you’re wondering if you should pay off debt faster or invest more; the answer could be easy to determine just by looking at the interest rate of your debt versus your expected investment return).

Financial choices can start feeling hard — or even impossible — once there is no objective measure of which option is better or worse. If the numbers tell you that either option can work for you, you can’t rely solely on that objective measurement to determine the best course of action.

It’s at this point where the conversation has to shift to subjective values.

The Role Of Your Values, Priorities, And Preferences In Financial Planning

In her TED Talk, Philosopher Ruth Chang says this is what truly makes a hard decision: when we have two options, we seek ways to compare them and make a judgement about which is better.

Comparing options is easy to do when you can quantify the options with real numbers, because you have clear outcomes: one option will be greater than, lesser than, or equal to the other.

But not all choices — even when they are financial choices or decisions about what to do with your money — can be quantified.

As Chang says, “the world of value is different from the world of science. The stuff of the one world can be quantified by real numbers. The stuff of the other world can’t.”

It might seem strange to say there are aspects of your finances that can’t be quantified by real numbers — but that’s exactly what happens when you get to a point where your income sufficiently covers your needs, many of your wants, and you still have money left over each month.

You then get to choose what to do with the money you have available.

Chang again explains that this is exactly what makes a decision hard: you have a number of alternatives that are not greater than, lesser than, or equal to each other.

There’s no set answer for the things you “should” do, or “ought” to do. That’s open-ended. The only real answer is what you decide is important to you, and of the highest value.

How You Can Improve The Quality Of Your Financial Decisions

In her TED Talk, Chang provides some advice for making better decisions when we face two options that, objectively, are pretty equal to each other and therefore there is no clear-cut “best” choice:

“When we face hard choices, we shouldn’t beat our head against a wall trying to figure out which alternative is better. There is no best alternative. Instead of looking for reasons out there, we should be looking for reasons in here: Who am I to be?”

Put another way, you can find the right answer to a hard choice if you consider which option best aligns with the person you want to be, or the values you want to live by.

That, at least, is the very philosophical answer to dealing with hard choices, which might not feel practice enough (especially when this is your money we’re talking about).

Using our values and ideal life vision to make financial decisions does not mean we should just completely throw all the numbers out the window and stop caring about financial facts.

We still need to consider your balance sheet, investment strategy, net worth, and a million other technical aspects that go into making a sound financial plan.

We need to look at the convergence of what we can quantify, like the numbers, and what we can’t, like your values and vision for your life.

This is how you can start making much higher-quality financial decisions: when you build a strategy that accounts for your financial reality and reasonable future assumptions and then factor your values, goals, and priorities into that framework.

That allows you to stay grounded in what the numbers are telling you… but it also points to the secret to making final decisions that bring you the most happiness and fulfillment.

Once you understand the objective landscape of your financial life and identify the choices you have available to you, the “best” course of action for you is the one that most closely reflects the person you want to be.

Eric Roberge is a CFP® and the founder of Beyond Your Hammock, a fee-only financial planning firm based in Boston. His goal is to help motivated professionals in their

Source: How To Think Though Hard Financial Choices And Make Better Money Decisions

.

References

“The Future of Jobs Report 2018” (PDF).

Was Your PPP Loan Less Than $50,000? Life Just Got (A Little Bit) Easier

On March 27, 2020, Donald Trump signed into law the Coronavirus Aid, Relief, and Economic Securities (CARES) Act, a $2.3 trillion relief package designed to help individuals and businesses weather the economic damage caused by the COVID-19 pandemic.

The headliner of the CARES Act was the creation of the PPP, a new loan program under Section 7(a) of the Small Business Act designed to put nearly $600 billion into the hands of small businesses for use in paying employee wages and other critical expenses throughout the pandemic.

The reason over two million businesses rushed to the bank to grab a PPP loan, however, was not because they were eager to saddle their struggling enterprises with more debt. Rather, the idea was that these PPP loans were loans in name only; once a borrower received the funds, the amount spent over the next 8 (now 24!) weeks on payroll, mortgage interest, rent and utilities would be eligible to be completely forgiven. Recommended For You

By late May, however, many borrowers were nearing the end of their 8-week periods, only to find that a number of barriers continued to prevent them from reaching full employment, and thus, achieving full forgiveness of their PPP loans. As a result, on June 5, 2020, Congress passed the Paycheck Protection Program Flexibility Act of 2020, which made several dramatic changes to the legislative text of the CARES Act.

In recent weeks, as Congress has worked towards yet another round of COVID-19 stimulus, there has been talk about even more tweaks being made to the PPP process, but the reality is, at this point, borrowers don’t want more, they want less.

Allow me to explain. Many PPP borrowers are through or nearing the end of their “covered period,” as discussed more fully below. It is now time for them to apply for forgiveness. But when these borrower’s are forced to address the endless morass of poorly-defined terms, ever-changing requirements, and collection of complicated calculations that make up the forgiveness process, they are routinely left with a raging case of buyer’s remorse.

As a result, most borrower’s don’t want more changes to the PPP loan program, they just want to be told that their debt will all magically go away, as they hoped it would when they rushed to borrow it. Or stated another way, they want to hear that their debt will be forgiven without having to pay more to their accountants to compute the forgivable amount than they borrowed in the first place.

Well today, borrowers finally got some good news. Or should I say, a narrow class of PPP borrowers got some good news. The SBA released a streamlined application — Form 3508S — designed specifically for those who borrowed less than $50,000.

Form 3508S
Form 3508S Nitti

A quick perusal of the instructions to the form makes clear that for this class of borrowers, forgiveness will still not be automatic. So where’s the good news? Several of the issues that make the standard application for forgiveness so confusing and time-consuming have now been removed for these small borrowers. Specifically, a borrower of a PPP loan of less than $50,000 is no longer required to reduce the amount eligible for forgiveness if the borrower:

  1. Reduces the salary or hourly wage of an employee (who earned less than $100,000 in 2019) during the “covered period” following the borrowing relative to the first quarter of 2020, or
  2. Reduces full-time equivalent employees (FTEs) during the covered period relative to a base period.

Stated in another way, a borrower of a PPP loan of less than $50,000 may apparently slash salary and fire FTEs with impunity. And while this new reality may run completely contrary to the initial intent of the PPP, it’s welcome relief to those tasked with applying for forgiveness.

Aside from those very important changes, the application process remains largely the same. A borrower must still do the math and compute the amount eligible for forgiveness; the difference, however, is that small borrowers are no longer required to show their math. Be warned, however: the instructions make clear that the SBA may request from the borrower support for their computation at any time.

Since you’ve read this far, perhaps it’s best that we (briefly) review the process of asking for forgiveness. If you’re not eligible to file on a Form 3508S — and must instead use the Form 3508 — please read these step-by-step instructions.

Getting Started

It all begins on the date the loan was received (or does it?) The borrower must then determine the amount spent on four classes of permitted expenses — payroll costs, mortgage interest, rent, and utilities — that are paid OR incurred throughout the “covered period,” a timeframe that has only grown more confusing since the passage of the CARES Act.

Covered Period

Courtesy of the June 5 legislation, the “covered period” can now be as many as FOUR different periods. The default setting is that the covered period is the 24-week period beginning on the date you received the loan disbursement. 

If you received your loan prior to June 5, 2020, however, you may elect to use the 8-week covered period provided by the CARES Act. Presumably, you would only do this if you 1) spent all of your PPP loan on eligible costs within the 8-week window, 2) did not reduce any salary or headcount during the 8-week period, and 3) are eager to move on from the PPP process and never speak of it again.

In computing payroll costs — and ONLY payroll costs — eligible for forgiveness, you are also permitted to choose an “alternative payroll covered period,” which is the 24-week (168 day) period beginning on the first day of the first pay period following the disbursement date, allowing a business to neatly align its covered period with the beginning of a pay period. Thus, if you received your PPP loan on April 20, 2020, and the first day of your next pay period is April 26, 2020, you may elect to count the payroll costs — and only the payroll costs — for the 24-week period beginning April 26, 2020, rather than the 24-week period beginning April 20, 2020.

Obviously, if you elect to use the 8-week covered period, you simply adjust the language above to suit a 56-day period rather than a 168-day period.

Paid or Incurred

Only costs “paid or incurred” during your appropriate covered period are eligible for forgiveness. Payroll costs are paid on the day the paychecks are distributed or the borrower originates an ACH credit transaction. Thus, you could have received PPP loans on April 26 and immediately paid – as part of your regular payroll process – wages that had been earned by the employees for the previous two weeks, and now include the amounts in the forgiveness calculation because the amounts had been PAID within the covered period.

Payroll costs are incurred on the day they are earned, and will be forgivable as long as they are paid no later than the next regular payroll date after the end of the covered period. Thus, if you covered period ends on November 1st, payroll incurred prior to that date, but paid AFTER that date, will be forgiven provided it is paid on its first regular due date after November 1st.

The rules for non-payroll costs are identical, except the “alternative payroll covered period” is not available. In order for costs such as mortgage interest, rent and utilities to qualify for forgiveness, these expenses must either be: 1) paid DURING the 24-week covered period, or 2) incurred during the 24-week period, and paid by its next regular due date, even if that due date is outside the 24-week period.

Once again, it would appear that by allowing all payments made DURING the period to be eligible for forgiveness, borrowers are permitted to pay rent, interest, or utilities related to periods prior to the 24-week period and have those expenses forgiven.

Payroll Costs

Payroll costs are the first, and largest, of the four classes of forgivable costs. It is a class, however, with four subclasses of its own: cash compensation, health care costs, retirement plan costs, and certain state and local taxes on employee compensation. The forgivable amounts for each subclass depend on whether they are being paid to an employee, an “owner-employee,” or a self-employed taxpayer.

Cash Compensation

The CARES Act provides that the amounts spent on “payroll costs” during the 24-week covered period are eligible for forgiveness. Including in payroll costs are certain compensation amounts; specifically, the sum of payments of any compensation with respect to employees that is a:

  • Salary, wage, commission, or similar compensation;
  • Payment of cash tip or equivalent;
  • Payment for vacation, parental, family, medical, or sick leave; or
  • Allowance for dismissal or separation.

Compensation does not include, however:

  •  The compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the covered period. As a result, in no situation can you have forgiven more than $46,154 (24/52 * $100,000) in payroll costs for any one employee. If you elect to use the 8-week covered period, the compensation paid to any one employee that is eligible for forgiveness cannot exceed $15,384 (8/52 * $100,000).
  • Any compensation of an employee whose principal place of residence is outside of the United States;
  • Qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act (Public Law 116–127); or
  • Qualified family leave wages for which a credit is allowed under section 7003 of the Families First Coronavirus Response Act (Public Law 116–127).

Additional limitations apply to self-employed taxpayers and “owner-employees.”

For a self-employed taxpayer with no employees, full forgiveness should be guaranteed as a result of the mechanics governing the initial borrowing and subsequent forgiveness. A self-employed taxpayer with no employees was entitled to borrow 2.5/12 of the self-employment income from the taxpayer’s 2019 Form Schedule C. Not coincidentally, after the passage of the PPP Flexibility Act, self-employed taxpayers with no employees will have forgiven 2.5/12 of the self-employment income from the taxpayer’s 2019 Form Schedule C. Because these two amounts will be the same, full forgiveness is guaranteed.

The rules are more complicated for “owner-employees,” only recently defined as one who owns 5% or more of the stock of a C or S corporation. Here, two limitations apply. First, the maximum compensation cost for 2020 is capped at 2.5 months of an annualized $100,000 salary, or $20,833 (or $15,384 for a borrower using the 8-week covered period). Compare this to the $46,152 an employee can be paid throughout the covered period.

Then, the forgivable amount is further limited to 2.5 months of the 2019 compensation of the owner-employee. This will prevent an owner from increasing their compensation during the covered period to maximize forgiveness by limiting the amount included in the forgivable amount to 10/52 of the owner’s compensation for 2019.

Non-Cash Compensation Payroll Costs

In addition to cash compensation, a borrower may have forgiven the sum of the following three expenses:

  1. Payment required for the provisions of group health care benefits, including insurance premiums;
  2. Payment of any retirement benefit; or
  3. Payment of State or local tax assessed on the compensation of employees.

For employees with no ownership interest, these amounts are in ADDITION TO the annualized compensation cap of $100,000. Thus, an employee could have up to $46,152 of compensation forgiven, as well as amounts allocable to that employee reflecting his or her share of health costs, retirement benefits, or state and local taxes.

For an owner-employee of a C corporation, all three costs are allowable in addition to the applicable cap. For an S corporation shareholder, however, no costs attributable to health care costs are forgivable, while the remaining two costs are forgivable in ADDITION TO the applicable cap. For a self-employed taxpayer, NONE of the costs are allowable.

Non-Payroll Costs

As a reminder, in addition to payroll costs, the CARES Act permits forgiveness for three other classes of expenses paid during the covered period.

  • Any payment of interest on any covered mortgage obligation (not including any prepayment of or payment of principal on a covered mortgage obligation). The term “covered mortgage obligation” means any indebtedness or debt instrument incurred in the ordinary course of business that is a liability of the borrower, is a mortgage on real or personal property, and was incurred before February 15, 2020,
  •  Any payment on any covered rent obligation. The term “covered rent obligation” means rent obligated under a leasing agreement in force before February 15, 2020 (recent rules were adding limiting rent expense to a related landlord), and
  • Any covered utility payment. The term “covered utility payment” means payment for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.

As we discussed in our “paid or incurred” section, it appears mortgage interest owed in arrears can be paid during the covered period and be forgiven, and mortgage interest incurred DURING the covered period but paid before or on the next scheduled due date will also be forgivable, even if that date is after the end of the covered period.

Putting it All Together

If you borrowed less than $50,000, you are still required to sum up the total costs outlined above and compute the amount of your forgiveness. Unlike those who borrowed MORE than that amount, however, your total amount eligible for forgiveness is not subject to reduction if you reduced salaries or headcount. So you’ve got that going for you. Which is nice.

Once you’ve summed your forgivable costs, the amount you report on the Form 3508S as your “forgiveness amount” is the lesser of three numbers:

  1. The sum of your forgivable costs,
  2. The principal of the loan, and
  3. The payroll costs — and ONLY the payroll costs — divided by 60%. This guarantees that no more than 40% of the forgiven amount will be attributable to the three classes of non-payroll costs.

Interestingly, on the standard Form 3508, the instructions provide that the final forgiveness amount is to be reduced by any Economic Injury Disaster Loan advance received by the taxpayer (up to $10,000). The instructions to Form 3508S, however, contain no such requirement.

Once you’ve gotten to this point, the application becomes MUCH less daunting than the standard Form 3508. No Schedule A. No worksheet to Schedule A. No FTE reduction quotient. Instead, you do all the math behind the scenes and drop the end result in the section titled “Forgiveness Amount.”

ibshop

The price of that brevity, however, is increased representations. You will now have to state on the application, among other representations, that:

Form 3508S reps
reps Nitti

But that’s it. Enter your general information at the top, and drop your application in the mail or send it through the ol’ interwebs. Unless the SBA decides to kick the tires, within a few months you should hear back on your forgiveness, take a deep breath, and revel in the knowledge that you’ll never have to think about the PPP again. Follow me on Twitter

Tony Nitti

Tony Nitti

I am a Tax Partner with RubinBrown in Aspen, Colorado. I am a CPA licensed in Colorado and New Jersey, and hold a Masters in Taxation from the University of Denver. My specialty is corporate and partnership taxation, with an emphasis on complex mergers and acquisitions structuring. W In my free time, I enjoy driving around in a van with my dog Maci, solving mysteries. I have been known to finish the New York Times Sunday crossword puzzle in less than 7 minutes, only to go back and do it again using only synonyms. I invented wool, but am so modest I allow sheep to take the credit. Dabbling in the culinary arts, I have won every Chili Cook-Off I ever entered, and several I haven’t. Lastly, and perhaps most notably, I once sang the national anthem at a World Series baseball game, though I was not in the vicinity of the microphone at the time.

.

.

بلیط هواپیما
همراه اول
همراه مکانیک
مدیران خودرو
همراه مکانیک

Do Not Ignore IRS Form 1099-C It Will Not End Well

1.jpg

Pay attention.  This is one of my posts with an important lesson rather than an entertaining story.  The lesson comes from a Tax Court decision – TCM 2018-140.  You will find out the taxpayer’s name if you read the case, but my practice in cases like this is to use a different name, since he might not want to be made more famous by this decision.  We’ll call him Joe.  In 2010, Joe had two debts discharged.  One was for $64,045 and the other for $300,134.

Each of the services sent him Form 1099-C.  And of course, they each sent a copy to the IRS.  Joe did not have a really strong year income wise in 2010, so he thought he did not need to file a return, which is why he ended up in Tax Court facing over $150,000 in tax and penalty.  It did not go well.  The lesson is to not be Joe.  Don’t just ignore Form 1099-C. I could leave it at that, but that would be too short a post.  So let’s look at the decision a bit and then consider what Joe should have done and the happy result that likely would have produced.

The Decision

It was pretty ugly.  Here are some high points.

Although petitioner received those Forms 1099-C, he chose to ignore them when the time came to file his Federal income tax return (return) for 2010. Instead, petitioner determined that because he did not earn wages that year he did not have an obligation to file a return for 2010, and he acted accordingly.

Right there Judge Nega is letting you know things are not going to go well for Joe. He “chose to ignore them when the time came to file”.  That is pretty harsh.

Joe had trouble figuring out exactly which debts related to the discharges, but he thought that one involved his principal residence, but he did not offer any proof that it was his principal residence.  Judge Nega seems to imply that he cut Joe some procedural slack, that was not taken advantage of.

At the close of trial, recognizing petitioner’s initial confusion and in order to provide petitioner an opportunity to establish his principal residence claim, we signaled that we might be amenable to a joint motion to reopen the record or the filing of further stipulations or concessions. On March 30, 2018, we issued a corresponding order directing petitioner to provide respondent with any documents relevant to his principal residence claim by May 14, 2018, and directing respondent to file any related motions or a status report by June 14, 2018. On June 14, 2018, respondent filed a status report indicating that petitioner failed to correspond with, or provide any documentation to, respondent despite his repeated attempts to engage petitioner. Accordingly, we decide this case on the basis of the record as submitted. Here is one of the key items.

While petitioner testified as to his economic misfortune and entered into evidence a handwritten document listing purported assets and liabilities, the record lacks any further substantive evidence, documentary or otherwise, to corroborate his insolvency claim. On the record before us, we find that petitioner has failed to carry his burden of proving that he was insolvent at the time the debts at issue were discharged, and we accordingly hold that he is ineligible for the insolvency exception.

Note.  In Tax Court, Joe has the burden of proving he is insolvent.  He has that burden in actual fact.  Had Joe filed a Form 1040 claiming insolvency, he would have had that burden in principle.  But he would only have had that burden in actual fact if his return was audited.  It was very easy for a computer to note that the 1099-Cs with Joe’s social security number were not reported.  From there it is all on autopilot.  Had Joe filed and claimed insolvency, human intervention would have been required in order to challenge his assertion.  More on that later.

Failure to file and failure to pay penalties were also upheld.

But What If?

If those loan servicers know their business, it seems pretty unlikely that Joe was solvent to the extent of over $360,000 after the discharge.  I don’t know.  Maybe he is a really good negotiator.  For the sake of argument let’s assume there is a good argument for insolvency.  Joe could have filed his Form 1040 and attached Form 982.  Take a look.  Check box 1(b) Discharge of indebtedness to the extent insolvent or maybe 1(e) for residence interest.  Then in Box 2 go for the gold and write in $364,179.  That should appease the computers anyway.  And even if it gets looked at, at least there is no failure to file.  I’m not going to get into Part II.  It only matters if you have tax attributes that you need to reduce.

If you want to be thorough you should got to Publication 4681 and fill out the worksheet on Page 6.  Note at the top right hand corner that it says “Keep for your records”.  That means you don’t have to send it in with your return.  So you could wait till they ask for it to fill it out.  And if they never ask for it, well you saved some time.

Had Joe taken those simple steps, I would put the odds at well over 90% that his return would have sailed through the system.

The Moral

Don’t ignore 1099-C (or 1099 anything actually). Don’t be Joe.

Other Coverage

I did not note that Lew Taishoff had covered this case, which is pretty unusual.  Mr. Taishoff covers the Tax Court with intense thoroughness. He alerted me though that he actually had without mentioning it by name.

The three T. C. Memos cases today, 8/29/18, are a trio of no-substantiations. Judge Judy and others of her ilk have much to answer for; people think they can go to court with no paper, no witnesses, and a sob story. Well, they can, but if they have burden of proof they’re sunk.

genesis-1-1-1-1-1-1

That reinforces my point about avoiding going to court, if you don’t have any evidence.  Reilly’s Laws of Tax Planning Prime Directive – If you don’t have documentation, at least have a plausible story – does not work as well in Tax Court as it might at the agent level.

Follow me on Twitter or LinkedIn. Check out my website.

I have been a CPA for over 30 years focusing on taxation. I have extensive experience with partnerships, real estate and high net worth individuals. My ideology can be summarized at least metaphorically by this quote: “I have a total irreverence for anything connected with society except that which makes the roads safer, the beer stronger, the food cheaper and the old men and old women warmer in the winter and happier in the summer.” – Brendan Behan.   Nobody I work for has any responsibility for what goes into this blog and you should make no inference that they approve of it or even have read it.

Source: /www.forbes.com/sites/peterjreilly/2018/09/20/do-not-ignore-irs-form-1099-c-it-will-not-end-well/#fb67c5b62890

.

Critics:

Taxpayers in the United States may have tax consequences when debt is cancelled. This is commonly known as COD (Cancellation of Debt) Income. According to the Internal Revenue Code, the discharge of indebtedness must be included in a taxpayer’s gross income.There are exceptions to this rule, however, so a careful examination of one’s COD income is important to determine any potential tax consequences.

Billions of dollars of cancelled debts will generate many unexpected tax bills, due to debt cancellations that financial institutions have started accelerating in 2012. The standard definition of income is found in a United States Supreme Court case entitled Commissioner v. Glenshaw Glass Co. The Court defined income as 1) accession to wealth; 2) that is clearly realized; and 3) over which the taxpayer has complete dominion.

Prior to this decision, the Court had already determined that the cancellation of debt was “a freeing of assets.”[5] Essentially, when debt is cancelled, money that would have been used to pay that debt is now free to be used on anything else the taxpayer wants. This is also known as “accession to wealth.” Therefore, under Glenshaw Glass, it seems only natural to include COD income in gross income.

Not all COD income must be included in gross income. There are several exceptions:

  • If the discharge of indebtedness occurs in a Title 11 case—i.e., a bankruptcy
  • If the discharge of indebtedness occurs when the taxpayer is insolvent
  • If the indebtedness discharged is qualified farm indebtedness
  • If the indebtedness discharged is qualified real property business indebtedness
  • If the indebtedness discharged is a student loan that has been discharged due to the death or total permanent disability of the borrower. This particular provision was added in the Tax Cuts and Jobs Act of 2017, and applies to discharges during calendar years 2018 through 2025. In addition, the Code recognizes a Purchase Price Adjustment exception.
  • Student loans forgiven for working for certain classes of employers are also excluded[18]

Requirements

In order to qualify under these exclusions, the taxpayer’s indebtedness must result from either

  • indebtedness for which the taxpayer is liable; or
  • indebtedness subject to which the taxpayer holds property

For example, if the lender cannot legally enforce the debt, then the taxpayer is not liable for that debt and will therefore not have tax consequences. If one of the two requirements are met, then the taxpayer must show that they fall under one of the five exclusions in order to avoid tax consequences on the COD Income.

%d bloggers like this: