Of course, there are many content producers on Instagram, TikTok, Facebook, YouTube, and Reddit that provide a grade-school level financial education. For example, wallstreetbets, an investing discussion forum on Reddit, recently led to a large influx of cash into the stock market, directed at GameStop. As a result, many investors were left with significant gains and a taste for investing.

For tax professionals, there are two points of advice that should be relayed to these clients: the tax consequences and potential bad investor habits.

Tax consequences

There are two types of capital gains: short-term and long-term gains. Short-term gains are for investments held less than one year and are taxed as ordinary income tax rates, similar to earned income.

Long-term gains are for investments held longer than one year and are taxed at specified rates of either 0%, 15%, or 20%, with the determining factors being filing status and income. Most of these new investors will end up either having short-term gains by cashing out and not realizing the benefit of long-term capital gains, or because they are investing in short-term securities such as options.  

Depending on the income level of the investors, there are pluses and minuses to the tax rate configuration. For example, for married couples who are making slightly over $80,000, the 12% ordinary tax rate is actually better for this group. There are many online calculators that will help with advising on the best tax scenario.

Reminding and educating the client of the tax consequences related to short- or long-term investing will help to ensure they don’t go and spend all of their proceeds. A common bad habit for even seasoned investors is forgetting to save or make an estimated tax payment for the taxes generated by selling an investment.

Potential bad investor habits

The larger concern for inexperienced investors is the potential bad habits that are born from this style of investing. Many of these new investors – while eager to learn – are often shortsighted and are getting their information from unqualified individuals. Many of these content producers tend to not provide sound financial information and disclaim that they are not providing financial advice to cover themselves legally.

Nevertheless, some producers have large followings, and ill-informed people act on rumors and misinformation, rather than the actual financial results of the underlying investment. Historically, as information shifts and they are unaware, it has ended poorly for this type of investor, leaving them with significant losses.

Another bad habit for those who do well initially is that they begin to believe that the trend will continue indefinitely, and they then make riskier investment decisions and/or begin trading in options without fully understanding how these types of securities work. These bad habits often lead to the irrational exuberance theory, where “bubbles” are created. Investors begin to hear rumors about an investment and flood the market, creating a bubble. However, the underlying investment doesn’t support the enthusiasm, or one bit of bad news pops the bubble and panic selling takes place.  

This often leads investors to sell too early to take full advantage of the market moving upward, causing them to lose gains, or buy too late and end up on the downward side of the investment with a loss. Unfortunately, far too often, these actions will deter some investors from continuing to learn, and take advantage of, sound investment opportunities in the future, fearing this cycle. They tend to end up relying on very conservative investments with lower returns.

How do you, as the trusted advisor, correct some of these habits?

• Point out that relying on historical data shouldn’t be the only factor in making
• Instead of simply relying on social media, help educate and point your new investor clients to solid resources with good reputations, such as Investopedia, Intuit’s mintlife blog, or whatever sources you believe are reputable.
• Remind them that investing is zero-sum; there will be gains, but there will always be losses.
• Suggest setting investment goals or boundaries per investment: “I will sell xxx when I reach a 20% gain, or a 5% loss.” This way, you are always on target with your investment objective.
• Suggest setting an investment objective: “Why are you investing?”

Personally, I advise telling the short-term investor that you are essentially gambling, looking at micro variations, and betting that the market will go in the direction that you are investing. Conversely, the long-term investor tends to be more macro, looking at the overall economy and stability. Historically, there is no indication that the long-term investor does better than a short-term investor. However, the work needed for consistent positive results for a short-term investor is significantly more than for the long-term investor.

COVID-19 resulted in people having more time to do research on investments, and that might be fruitful in the short term. I hope these new investors continue to become more educated and invest wisely. With your help, becoming more financially literate contributes to the success of our economy and ultimately leads to a golden lining.

One last note: If you are not comfortable with providing financial or investment advice, don’t do it. Consider reading my article, “How adding financial planning can turn a seasonal tax practice into a year-round business,” or find a local professional to partner with and trade referrals. You can also search for “tax and financial planning” professionals on Find-a-ProAdvisor, and check out the CFP Board for more information.

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Editor’s note: Regulations and guidance from the SBA and the U.S. Department of Treasury on the PPP are evolving rapidly. Please refer to the latest guidance from SBA and Treasury to confirm current program rules and how they apply to your particular situation.

How to help your clients apply for PPP loan forgiveness

In 2020, the U.S. Congress passed a series of acts in an attempt to ease the economic burden placed on businesses caused by restrictions due to COVID-19. One of these, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, created the Paycheck Protection Program (PPP). This program allowed for eligible businesses throughout the country to apply and receive loans from essential qualifier lenders to continue to pay employees, even if those businesses reduced hours or were closed. Currently, we are entering the period where many of these businesses have spent their PPP loan funds and are needing to apply for forgiveness of these loans.

A number of factors will ultimately determine the amount of information a PPP loan recipient will need to provide to their lender (or the lender servicing their loan) to complete the forgiveness application. From my experience, here are my best practices regarding the PPP loan forgiveness process.

For Form 3508, Paycheck Protection Program Loan Forgiveness Application,and 3508EZ, Paycheck Protection Program EZ Loan Forgiveness Application,documentation is the key. Among the number of applications I have completed for clients and others, pulling together the necessary documentation has taken the longest time. Though the rules per the SBA (which is administering this program) and the actual application seem straightforward, the lenders are responsible for approving or denying loan forgiveness applications. Even the 3508EZ requires the same documentation as the standard 3508 forgiveness application.

What your clients will need

Gather the necessary documents in PDF format. In addition, this is neither an exhaustive list nor will all SBA-approved lenders require all items listed, as each lender appears to have their own due diligence requirements. See more details here.

For the EZ filer, this documentation is used simply to substantiate that the loan was spent on the stated expenses. For the standard 3508, this documentation will also be used to assist in the completion of Schedule A and the associated worksheets, and is typically entered into the lender’s application portals. 

Schedule A is really what distinguishes between the 3508 and the EZ form. Each of the SBA-approved lenders do attempt to assist in the completion of the calculations from these worksheets, either through online or downloadable excel worksheets. However, much of the jargon used in the application portal makes it very difficult for non-accounting/financial persons to use these portals and forms. I have been contacted by numerous individuals on how to complete this schedule.

In the event that the lender doesn’t provide a good calculator, a spreadsheet will be required if there are more than a handful of employees.

For Safe Harbor check boxes, most, if not all, businesses should be checking the box for Safe Harbor 1. Essentially, this is saying COVID-19 affected this business and that this was the reason we needed this PPP Loan. On the “no reduction” checkbox, my interpretation is that this can be taken in two ways: either the PPP worked as designed or the business did not need this loan and might need some additional scrutiny. Safe Harbor 2 is for employers with part-time or seasonal staff, but should not be overlooked if the business was forced to reduce hours and cut the employee’s hours as well.

Points of advice

Many professionals might be of the mindset to provide only what is asked or even less. I have attempted this, and each time the lender has come back with requests for more documentation. It is similar to the level of how mortgage lenders require so much documentation. Therefore, on the last couple of applications, we simply provided the above outlined documentation, and as of the writing of this, none of the lenders have come back requesting more. 

Remember the math. These loans were originally designed to cover 2.5 months of eligible payroll costs, but recipients were ultimately given six months to spend the funds on eligible payroll and non-payroll costs. Unless the business really attempted to stretch the funds or didn’t use the funds as required, there should be enough expenses on Line 1 under cash compensation to cover the loan proceeds. If that is not the case, double check the math, and then ensure you are adding expenses to Lines 6 to 9 of Schedule A to cover the shortfall.

PPP loan forgiveness is a process; depending on the number of employees, you can expect to spend a minimum of an hour going through the calculations, and working within the lender’s application portal. You should review the calculations to ensure everything is correct. These businesses that are struggling to stay operational are asking for taxpayer funds to maintain their business and pay their employees. If the PPP loan forgiveness application gets rejected, remember that you can appeal.

Disclosures:

Note: PPP borrowers may engage the services of an accountant to track the use of their PPP funds. However, only the borrower or an authorized representative who is legally authorized to make certifications on the borrower’s behalf may submit an application for loan forgiveness. Accountants should be aware of this limitation and ensure that an authorized representative of the borrower understands his or her obligation to complete, review, and certify to the contents of any loan forgiveness application. Regulations and guidance from the SBA and the U.S. Department of the Treasury on the PPP are evolving rapidly, and the above information may be outdated. Please refer to the latest guidance from SBA and Treasury to confirm current program rules and how they apply to your particular situation.

The funding described is made available to businesses located in the United States of America and is not available in other locations. 

This content is for information purposes only and should not be considered legal, accounting or tax advice, or a substitute for obtaining such advice specific to your business. Additional information and exceptions may apply. Applicable laws may vary by state or locality. No assurance is given that the information is comprehensive in its coverage or that it is suitable in dealing with a customer’s particular situation. Intuit Inc. does not have any responsibility for updating or revising any information presented herein. Accordingly, the information provided should not be relied upon as a substitute for independent research. Intuit Inc. does not warrant that the material contained herein will continue to be accurate, nor that it is completely free of errors when published. Readers should verify statements before relying on them.

PPP loan and forgiveness calculations and eligibility may vary. Refer to the SBA.gov for information about your particular situation.

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