This may surprise you: Wall Street analysts expect earnings for the S&P 500 to increase 8% during 2023, despite all the buzz about a possible recession as the Federal Reserve tightens monetary policy to quell inflation.
Ken Laudan, a portfolio manager at Kornitzer Capital Management in Mission, Kan., isn’t buying it. He expects an “earnings recession” for the S&P 500
SPX,
+2.69%
— that is, a decline in profits of around 10%. But he also expects that decline to set up a bottom for the stock market.
Laudan’s predictions for the S&P 500 ‘earnings recession’ and bottom
Laudan, who manages the $83 million Buffalo Large Cap Fund
BUFEX,
-2.86%
and co-manages the $905 million Buffalo Discovery Fund
BUFTX,
-2.82%,
said during an interview: “It is not unusual to see a 20% hit [to earnings] in a modest recession. Margins have peaked.”
The consensus among analysts polled by FactSet is for weighted aggregate earnings for the S&P 500 to total $238.23 a share in 2023, which would be an 8% increase from the current 2022 EPS estimate of $220.63.
Laudan said his base case for 2023 is for earnings of about $195 to $200 a share and for that decline in earnings (about 9% to 12% from the current consensus estimate for 2022) to be “coupled with an economic recession of some sort.”
He expects the Wall Street estimates to come down, and said that “once Street estimates get to $205 or $210, I think stocks will take off.”
He went further, saying “things get really interesting at 3200 or 3300 on the S&P.” The S&P 500 closed at 3583.07 on Oct. 14, a decline of 24.8% for 2022, excluding dividends.
Laudan said the Buffalo Large Cap Fund was about 7% in cash, as he was keeping some powder dry for stock purchases at lower prices, adding that he has been “fairly defensive” since October 2021 and was continuing to focus on “steady dividend-paying companies with strong balance sheets.”
Leaders for the stock market’s recovery
After the market hits bottom, Laudan expects a recovery for stocks to begin next year, as “valuations will discount and respond more quickly than the earnings will.”
He expects “long-duration technology growth stocks” to lead the rally, because “they got hit first.” When asked if Nvidia Corp.
NVDA,
+5.93%
and Advanced Micro Devices Inc.
AMD,
+3.77%
were good examples, in light of the broad decline for semiconductor stocks and because both are held by the Buffalo Large Cap Fund, Laudan said: “They led us down and they will bounce first.”
Laudan said his “largest tech holding” is ASML Holding N.V.
ASML,
+3.60%,
which provides equipment and systems used to fabricate computer chips.
Among the largest tech-oriented companies, the Buffalo Large Cap fund also holds shares of Apple Inc.
AAPL,
+3.13%,
Microsoft Corp.
MSFT,
+3.85%,
Amazon.com Inc.
AMZN,
+6.28%
and Alphabet Inc.
GOOG,
+4.05%
GOOGL,
+3.86%.
Laudan also said he had been “overweight’ in UnitedHealth Group Inc.
UNH,
+1.31%,
Danaher Corp.
DHR,
+2.60%
and Linde PLC
LIN,
+2.30%
recently and had taken advantage of the decline in Adobe Inc.’s
ADBE,
+1.97%
price following the announcement of its $20 billion acquisition of Figma, by scooping up more shares.
Summarizing the declines
To illustrate what a brutal year it has been for semiconductor stocks, the iShares Semiconductor ETF
SOXX,
+2.02%,
which tracks the PHLX Semiconductor Index
SOX,
+2.22%
of 30 U.S.-listed chip makers and related equipment manufacturers, has dropped 44% this year. Then again, SOXX had risen 38% over the past three years and 81% for five years, underlining the importance of long-term thinking for stock investors, even during this terrible bear market for this particular tech space.
Here’s a summary of changes in stock prices (again, excluding dividends) and forward price-to-forward-earnings valuations during 2022 through Oct. 14 for every stock mentioned in this article. The stocks are sorted alphabetically:
Company
Ticker
2022 price change
Forward P/E
Forward P/E as of Dec. 31, 2021
Apple Inc.
AAPL,
+3.13%
-22%
22.2
30.2
Adobe Inc.
ADBE,
+1.97%
-49%
19.4
40.5
Amazon.com Inc.
AMZN,
+6.28%
-36%
62.1
64.9
Advanced Micro Devices Inc.
AMD,
+3.77%
-61%
14.7
43.1
ASML Holding N.V. ADR
ASML,
+3.60%
-52%
22.7
41.2
Danaher Corp.
DHR,
+2.60%
-23%
24.3
32.1
Alphabet Inc. Class C
GOOG,
+4.05%
-33%
17.5
25.3
Linde PLC
LIN,
+2.30%
-21%
22.2
29.6
Microsoft Corp.
MSFT,
+3.85%
-32%
22.5
34.0
Nvidia Corp.
NVDA,
+5.93%
-62%
28.9
58.0
UnitedHealth Group Inc.
UNH,
+1.31%
2%
21.5
23.2
Source: FactSet
You can click on the tickers for more about each company. Click here for Tomi Kilgore’s detailed guide to the wealth of information available free on the MarketWatch quote page.
The forward P/E ratio for the S&P 500 declined to 16.9 as of the close on Oct. 14 from 24.5 at the end of 2021, while the forward P/E for SOXX declined to 13.2 from 27.1.
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Researchers at the University of North Carolina Tax Center analyzed securities filings to determine what companies would have paid if the tax had been in place last year. They found fewer than 80 publicly traded U.S. companies would have paid any corporate minimum tax in 2021, and just six—including Amazon and
Warren Buffett’s
conglomerate—would have paid half of the estimated $32 billion in revenue the levy would have generated.
The tax, which takes effect in January, is the largest revenue-raising provision in Democrats’ climate, healthcare and tax law. The provision, projected to generate $222 billion over a decade, alters tax incentives and complicates corporate tax decisions. Democrats aimed the provision at large companies that report profits to shareholders but pay relatively little tax.
Berkshire Hathaway would have paid $8.3 billion last year if the new tax law had been in place, according to UNC estimates.
Photo:
Michelle Bishop/Bloomberg News
“Who actually pays a lot is just not very many firms at all,” said Jeff Hoopes, an accounting professor at UNC Chapel Hill who is one of the study’s authors. “My guess is it will not be the same firms every single year.”
Although this wasn’t the aim of the law, it could have an impact on some of the wealthiest Americans. Some Democrats proposed direct taxes on billionaires’ unrealized capital gains earlier in the legislative process. While that wasn’t adopted, the new corporate minimum tax would increase the tax burden on some wealthy shareholders, such as Warren Buffett at Berkshire and
Jeff Bezos
at Amazon.
Mr. Buffett owned 16% of Berkshire Hathaway’s shares earlier this year, while Mr. Bezos owned nearly 13% of Amazon’s, securities filings show. Representatives for Messrs. Bezos and Buffett declined to comment.
Corporate tax directors and accounting firms are also analyzing the law, figuring out how they are affected and preparing to lobby over regulations. Few have estimated its impact publicly.
The UNC analysis comes with caveats. Lacking confidential tax returns that would allow precise calculations, the authors used publicly available financial data. Companies might change behavior to minimize taxes. A one-year snapshot includes unusual situations that cause companies to pay the minimum tax once, generating tax credits that can be used in future years.
Jeff Bezos owned nearly 13% of Amazon shares earlier this year, securities filings indicated.
Photo:
Jay Biggerstaff/USA TODAY Sports
Under the new law, companies averaging more than $1 billion in publicly reported annual profits calculate their taxes twice: once under the regular system with a 21% rate and again with a 15% rate and different rules for deductions and credits. They pay whichever is higher.
The new system, known as the book minimum tax, starts with income reported on the financial statement, not traditional taxable income. Differences between the two—the treatment of stock-based compensation, for example—could drive a company into paying the new tax.
According to the UNC estimates, Berkshire Hathaway would have paid the most in 2021, at $8.3 billion—or about a quarter of the estimated total—followed by Amazon at $2.8 billion and
Ford Motor Co.
at $1.9 billion.
Add the next three companies and that reflects more than half the $31.8 billion total:
AT&T Inc.
at $1.5 billion,
eBay Inc.
at $1.3 billion, and
Moderna Inc.
at $1.2 billion.
Berkshire Hathaway didn’t comment. Amazon declined to comment on the figure but said it awaits federal guidance. Amazon said its taxes reflect a combination of investment and compensation decisions and U.S. laws.
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An AT&T spokesman said the company doesn’t expect the minimum tax to affect its 2023 tax bill. “Academics don’t prepare our taxes; trained and expert tax professionals do that work,” the spokesman said.
Moderna’s tax rate in 2021—its first year with an operating profit—was shaped by the use of deductible net operating losses generated from research expenses, said
Jamey Mock,
the company’s chief financial officer. The company also paid much of its 2021 taxes during 2022. “We do not anticipate those unique conditions factoring into our future tax considerations,” he said.
Melissa Miller, a Ford spokeswoman, said the company pays all the taxes it owes and pointed to tax credits in the law designed to accelerate the transition to electric vehicles.
Heather Jurek, eBay’s vice president of tax, said the study’s computations and interpretations of the law are inaccurate when applied to the company. “UNC’s conclusions are driven by a significant disposition in 2021 that eBay is unlikely to replicate,” she said.
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Exelon Corp.
is among the few companies that has disclosed what it anticipates to be detailed effects from the tax. The utility-services holding company said in an August securities filing that it expected to incur annual cash costs of about $200 million starting next year, down from an earlier $300 million estimate.
Exelon said it continues to evaluate the tax provision and it expects to benefit from legislative provisions encouraging investment in electric vehicles and electrical-grid modernization.
Lynn Good,
chief executive of
Duke Energy Corp.
, told investors in August that the utility giant also expects to be affected, without providing figures. A spokesman said the UNC estimate, $802 million based on 2021 income, is far too high. He said the company also expects to benefit from the legislation’s tax credits for renewable and nuclear power.
Linking taxes closer to publicly reported profits is intentional. It will become harder for companies to maximize profits to impress shareholders while managing taxable profits downward to minimize payments to governments, tax advisers say.
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Mr. Biden has said the new tax means that the days of profitable companies paying no tax are over.
“There are companies that, for a variety of reasons, will perpetually be in a minimum-tax position,” said April Little of accounting firm Grant Thornton LLP.
Some profitable companies could still pay very little or no federal income taxes. Companies can offset up to 75% of tax liability with credits—including renewable-energy incentives Congress just expanded. The law includes special provisions benefiting companies with wireless spectrum investments, defined-benefit pensions and significant capital investments.
“We have the anti-loophole tax bill that’s full of loopholes,” Mr. Hoopes said.
Tax advisers say companies are trying to understand the law, pointing to uncertainties such as the treatment of currency losses and gains, capitalized depreciation deductions and rules around mergers and acquisitions.
By early next year, companies will start providing earnings guidance, making estimated-tax payments and reflecting the tax in quarterly earnings. They might also start crafting mitigation strategies and looking for flexibility in the accounting rules for when income and expenses are counted.
“What I see most people doing right now is worrying about: How is it supposed to work? How am I going to do this without going crazy?” said Diana Wollman, a partner at law firm Cleary, Gottlieb, Steen & Hamilton LLP.
“They’re spending more time trying to figure out what they want to ask for in regulations in terms of either clarity or regulatory discretion than they are trying to figure out how they’re going to game it,” Ms. Wollman said.
Write to Richard Rubin at richard.rubin@wsj.com and Theo Francis at theo.francis@wsj.com
Ernst & Young’s leaders are expected this week to give the green light to splitting its auditing and consulting businesses, paving the way for the biggest shake-up in the accounting profession in more than 20 years, according to people familiar with the matter.
The accounting giant’s global executive committee, which oversees the firm’s 312,000-person worldwide network, met on Labor Day to put the finishing touches to the plan for a worldwide breakup, the people familiar with the matter said. The committee is expected to approve the plan later this week, which will trigger votes on the deal by EY’s roughly 13,000 partners, who stand to make windfalls averaging more than a million dollars each.
The split, penciled in for late next year, would separate EY’s accountants who check the books of companies such as
Amazon Inc.
from its faster-growing consulting business of advising on technology, deals and other issues.
EY’s move could radically reshape the accounting landscape if it goes to plan, industry watchers said.
An EY spokeswoman said that discussions were continuing and that “at this time, no decision has been made on moving to the next phase.”
EY is one of the Big Four firms that dominate auditing in major financial markets and whose multibillion-dollar consulting arms compete with the likes of Accenture PLC and International Business Machines Corp.
“There’s a good chance it will cause other big firms to follow suit,” said Martin White, a senior analyst at Source Global Research, a consulting-industry research company. “Who doesn’t want a massive payday if you think it’s there and it’s not going to cause [your business] longer-term harm?”
EY’s rivals say they intend to keep auditing and consulting under one roof. Deloitte held exploratory talks with bankers after news of the EY plan emerged, The Wall Street Journal previously reported, but says it isn’t planning a split. A spokesman said Deloitte “will not separate and split our businesses and we will not monetize our collective life’s work.” KPMG said in a statement that its current model brings a “range of benefits,” and PricewaterhouseCoopers said it is “fully committed” to its multidisciplinary strategy.
EY’s planned split would divide its $45 billion-revenue global network roughly 60:40 between the consulting business and the audit-focused partnership, which would retain the EY brand, according to a May version of the proposal reviewed by the Journal. The new consulting company was forecast to raise some $10 billion by selling a 15% stake to the public at the time of the split, in addition to borrowing $17 billion to help fund partner payouts.
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EY’s partners have a strong financial inducement to back the deal. The audit partners are in line for cash payouts, which were in June expected to average two to four times annual compensation. Those multiples may have declined as markets have fallen in recent weeks. Still, the windfalls are expected to be worth well over a million dollars for the typical U.S. and U.K. partners, who earn on average $850,000 to $900,000 a year, according to people familiar with the matter.
On the consulting side, partners are promised shares in the new company, which were in June expected to be worth typically seven to nine times their annual compensation, paid out over five years.
Carmine Di Sibio,
EY’s global chairman and chief executive who has spearheaded the proposed split, is in line for a windfall of tens of millions of dollars, the people familiar with the matter said.
EY’s leaders are expected to say the split will be good for the firm’s finances, as well as their own, according to the people familiar with the matter. They hope the breakup will free the consultants to win billions of dollars of new business, unfettered by independence rules that restrict the work accounting firms can do for audit clients, the people said.
Carmine Di Sibio, EY’s global chairman and chief executive, has spearheaded the proposed split.
Photo:
Hollie Adams/Bloomberg News
EY checks the books of a raft of Silicon Valley giants, including Amazon,
Salesforce Inc.,
Workday Inc.
and Google parent
Alphabet Inc.
That limits its ability to compete in the fast-growing area of consultants teaming up with tech giants to sell outsourced services to companies.
Once the carefully choreographed “go” decision has been announced this week, the firms that make up EY’s roughly 140-country global network are expected to vote on the plans this fall and early next year, according to the people familiar with the matter. The decision, originally scheduled for June, was delayed to make sure the leaders of the U.S. and other big member firms were happy with the proposal, the people familiar with the matter said. The sticking points included the treatment of around $10 billion of promised payments to retired partners, the Journal previously reported.
The decision is also expected to signal the start of negotiations with the Securities and Exchange Commission and other regulators worldwide who will need to sign off on the deal.
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The watchdogs are expected to be pleased by the reduction of potential conflicts of interest, a longstanding problem in the industry. They will want to be assured that EY’s audit-focused firm will be sufficiently resilient to withstand potential blockbuster litigation damages, despite its sharply reduced size.
EY is facing multibillion-dollar legal claims in Germany and the U.K. over its allegedly failed audits of two corporate blowups, fintech company
Wirecard AG
and hospital operator NMC Health PLC. EY has said it stands by its audit work.
Another issue that needs clearance by the regulators is branding. Paul Munter, the SEC’s acting chief accountant, said last month that after an accounting firm sells off part of its business, the new entity shouldn’t profit from the accounting firm’s name or logo. The two businesses can’t share any marketing or advertising, he added.
The new EY consulting company will have to spend heavily to build up its new brand, according to Tom Rodenhauser, managing director at Kennedy Research Reports, which analyzes the consulting industry.
Andersen Consulting,
the consulting arm of the former Big Five firm, spent “millions and millions and millions of dollars” on its successful rebranding as Accenture, Mr. Rodenhauser said. “EY consulting will have to make that same kind of investment.”
Accounting giant Ernst & Young will pay $100 million to settle charges with the Securities and Exchange Commission that hundreds of its employees cheated on the ethics components of the Certified Public Accountant examination and continuing education courses and for withholding information about the misconduct to regulators.
“It’s simply outrageous that the very professionals responsible for catching cheating by clients cheated on ethics exams of all things,” Gurbir Grewal, the SEC’s enforcement chief said in a press release. “And it’s equally shocking that Ernst & Young hindered our investigation of this misconduct.”
The SEC’s order states that between 2017 and 2019, 49 audit professionals at the firm sent or received answer keys to the CPA ethics exams, while hundreds more cheated on continuing professional education courses required by state accountancy boards for accountants to maintain their licenses.
The $100 million fine is twice that levied against competitor KPMG back in 2019 for similar violations, and the severity of the fine against Ernst & Young is due in part to its obstruction of regulators investigation, according to senior SEC officials.
Ernst & Young admitted that during the SEC’s investigation, the company misled the regulator by declining to share information about potential cheating on the CPA exam that had been shared with it.
“EY also admits that it did not correct its submission even after it launched an internal investigation into cheating on CPA ethics and other exams and confirmed there had been cheating, and even after its senior lawyers discussed the matter with members of the firm’s senior management,” the SEC said in a press release.
In addition to the monetary penalty, the SEC order requires the company to hire two separate independent consultants to review its policies and procedures related to ethics and integrity and to review the company’s failure to disclose the misconduct during the regulatory investigation.
The fines come as major global accountancy firms reexamine their business models, with both Ernst and Young and a competitor, Deloitte, reportedly considering spinning of their consultancy businesses into separate entities.
The Wall Street Journal reported in March that the SEC is probing the industry to understand how conglomerates with accounting and consultancy arms manage conflicts of interest between those lines of business.
Americans accumulated extra savings during the pandemic, but that money is fast dwindling because of inflation.
Some 70% of Americans are using their savings to cover rising prices, a recent Forbes Advisor survey of 2,000 U.S. adults concluded. Among those polled, older adults were more likely to say they have left their savings intact.
In fact, the personal savings rate for April 2022 hit 4.4% — the lowest level since September 2008 — down from 6% at the beginning of the year, according to the Bureau of Economic Analysis, a department of the U.S. Department of Commerce.
Another concern: More respondents told a New York Federal Reserve “Survey of Consumer Expectations” that their finances are worse now than they were a year ago. In fact, the average perceived chance of missing a minimum debt payment in the next three months increased by 0.4 percentage point to 11.1%, according to the results of the survey released Monday.
“Median household nominal spending growth expectations increased sharply to 9% from 8% in April,” the NY Fed said. “This is the fifth consecutive increase and a new series high. The increase was most pronounced for respondents between the age of 40 and 60 and respondents without a college education.”
That slump in savings and rise in spending comes at a time when the drum beat of recession grows louder. Case in point: Nearly 70% of 49 respondents expect the National Bureau of Economic Research to declare a recession next year, according to the FT survey published Sunday; the survey was conducted with the Initiative on Global Markets at the University of Chicago Booth’s School of Business.
Though some Americans have built up savings during the pandemic, helped by COVID-related government benefits, those savings appear to be running low as people cope with rising prices.
Laura Veldkamp, a finance and economic professor at Columbia University, suggested people try renegotiating salaries with their employers. “Prices will not come back down,” she said. “They never do.” Dipping into savings to cope with rising prices is not a sustainable long-term solution, she added.
The increase in the cost of living is making Americans nervous. Inflation rose 8.6% on the year through May, the highest since 1981. A survey of U.S. consumer confidence fell in May to a three-month low of 106.4. That’s one of many surveys pointing to a pessimistic outlook by people both for their own finances and the U.S. economy.
For the week ending May 29, grocery inflation reached a record high of 14.6% compared to a year ago, according to the latest survey from data company Numerator. The survey shows that middle-income consumers — those who earn $40,000 to $80,000 a year — are paying the greatest price increases among all income levels.
“‘Cutting down on your budget doesn’t need to be painful.’”
— Thomas Scanlon, a financial adviser with Raymond James Financial
In April, consumer spending increased by $152.3 billion, separate Bureau of Economic Analysis data found, with people spending the most money on motor vehicles and auto parts, in addition to food and housing. Compared to the month before, the consumption of gas and other energy decreased by $26.9 billion.
On Sunday, AAA pegged the national average at $5.01 for a gallon of gasoline. That’s 20 cents higher than it was a week ago, 60 cents higher than a month ago, and almost $2 more than the $3.07 average a year ago, according to AAA data.
Thomas Scanlon, a financial adviser with Raymond James Financial in Manchester, Conn., said it’s a good time to adopt thrifty habits, such as borrowing from the public library instead of buying a book, and looking to free leisure activities such as visits to some museums and beaches.
“Cutting down on your budget doesn’t need to be painful,” Scanlon said, “it can be an opportunity to spend a good time with friends and families.”
Amy Faust Liggayu, 32, a market-research project manager based in Tinley Park, Ill., mother of a 7-month-old son, never imagined she would have a life where she could spend five days a week with him, while also working full time. But that was before March 2020, when the COVID-19 pandemic forced offices across the country to tell their employees to work from home.
She had previously spent $20 a day commuting four days a week, and worked the fifth day from home, but when her manager called employees back full time, a move many other businesses are making now that vaccines are widely available and the worst days of the pandemic appear to have receded, she was not willing to give up all that freedom remote work had given her.
Those early months of COVID-19 when millions of people worked from home gave them a rare opportunity to reevaluate the role of work in their lives. And in 2022 they have leverage: Unemployment is falling and wages are rising, as companies struggle to attract and retain workers. In fact, there are two job openings for every unemployed American, the highest level on record since 2001.
But many companies want workers back. Google parent company Alphabet
GOOGL,
-1.34%
GOOG,
-1.29%,
Apple
AAPL,
+0.17%,
Facebook parent Meta
FB,
+1.18%,
and Microsoft Corp.
MSFT,
-0.23%
have requested workers go back to the office at least a few days a week. Jefferies Financial Group
JEF,
-0.98%,
JPMorgan Chase
JPM,
-0.82%
and Goldman Sachs Group
GS,
-0.45%
are among the financial institutions that have also asked workers to return.
Amid these efforts, Faust Liggayu counts herself among the Great Resistance. “I’m very outspoken about my desire to never work in an office again,” she said. “The quality of life is so much better when you can cut out that commute or spend your lunch break with your family.” She would often not arrive home until 6:30 p.m. if she left the office at 5 p.m. Those were precious hours lost with her son.
When she received news that all employees were going to be back in the offices, she told MarketWatch that she was frustrated. “They haven’t been listening to me,” she recalls thinking. “They know I don’t want to go back.” So she took a stand. “Job recruiters were reaching out to me on LinkedIn. All the jobs they reached out to me about were working from home.”
The outcome was a win-win for her: She found a new job two months ago that paid more money, while working full-time from home. “I went from making $50,000 a year to $80,000. When I get to stop at 5 p.m., I’m done. I get to spend that time with my son. Time moves quickly. It means so much at this age. It means so much to get those extra two hours a night with him.”
Amid labor shortage, employees flex their muscles
The Great Resignation — regarded by some observers as more of a Great Negotiation for better pay and working conditions — has led to the Great Resistance, a battle of wills between senior management and, well, everyone else. For those who are fortunate enough to have the option to work remotely, which other figures put at 40% of the workforce, they’re not giving up.
“There is definitely a sense of resistance amongst employees against the full-week, all-day, in-person work concept,” said Vanessa Burbano, associate professor of business at Columbia Business School in New York. “Remote working enables a degree of flexibility in the day that is practically impossible to recreate in a physical co-working space.”
Faust Liggayu said her breakup with her former employer was respectful and without animosity. She had worked at that previous job from 2017 to March 2022, and it was a small team. But the standoff between some employees and their companies has not always been so free of drama. Apple, for one, has suffered at least one high-profile resignation as a result.
“The Great Resignation has led to the Great Resistance, a battle of wills between senior management and, well, everyone else. ”
A group, “Apple Together,” signed an open letter to the tech giant, claiming over 3,000 signatures from workers, rejecting a hybrid work model and asking the company to allow them to make their own decisions. “Stop treating us like school kids who need to be told when to be where and what homework to do,” they wrote. (Apple did not respond to a request for comment.)
Thus far, workers have successfully dug their feet into their sofas. Some 64% said they would consider looking for a new job if they were required to return to the office full time, a survey by ADP, a provider of human resources management software and services, found. Younger people (18- to 24-year-olds) are the most reluctant (71%) to return to the workplace full time.
“This shift from the traditional 9-to-5, office-based model cannot be undone and has long-term implications for the jobs market,” the report said. “As companies — and employees — re-evaluate their approach to the workforce, it is clear that having a flexible approach is key, as there are advantages and drawbacks to both exclusively, whether fully remote or fully in office.”
Last month, Airbnb acknowledged that the era of full- or even part-time office working is over, telling workers they could work from home or the office, if they choose, and they can work from anywhere in the U.S. without a change in pay. Starting in September, they can also live and work in over 170 countries for up to 90 days a year in each location.
Ken Steinbach: ‘There is a special connection when we are in the same space together face to face.’
There’s no such thing as a free lunch
Chris Herd, CEO of Firstbase, which helps companies go remote, said there’s no such thing as a free lunch. “Workers don’t want toys or free food, they want a higher quality of life. Forcing people to commute two hours a day — where they carry laptops to an office to sit in a chair for eight hours and then Slack or Zoom
ZM,
-1.32%
people who aren’t in the office all day — has created broken ways of living.”
He said the Great Resignation reflects people’s desperation for better work-life balance and believes that giving ultimatums will lead to “armageddon” inside companies. “Over the last two years, companies have found out people don’t need to be in the office for great work to keep happening,” he said. “Now, companies are pushing back for employees to return to office again.”
Nicholas Bloom, professor in the Department of Economics at Stanford University, said neither hard nor soft nudges will work. His own poll of 3,000 people revealed a “fiendishly hard” task for managers to get people back. “Nobody commutes for one hour for a free bagel or box or to use a ping-pong table,” he said. “They come in to catch up with friends and work in person.”
“‘If you have to force somebody to come to the office it is not in their interests to come in.’”
— Nicholas Bloom, professor in the Department of Economics at Stanford University
Indeed, some Silicon Valley companies pulled out all the stops to entice people back and foster a sense of community, he told MarketWatch. “Google got so desperate they hired Lizzo to give a concert, which is great for one day, but unless you are planning on getting Katy Perry, Taylor Swift and then Justin Bieber after that, this is not a permanent solution.”
“The resistance is there when employees do not see the point in coming in,” Bloom said. “If you have to force somebody to come to the office it is not in their interests to come in. To avoid forcing people you need to make it benefit them to come in. That means setting up typically two or three days a week of office time on anchor days when everyone comes in.”
He said it makes more sense to create a hybrid environment where team members show up on the same day rather than enforce a five-day week and fail. “So I see resistance to returning to the office a symptom of over-ambitious return to office plans. Realistic plans centered around anchor days, probably two to start off with, can work well and firms can build on this.”
For those who can work from home, this may be a luxury problem. The Labor Department says only 7.7% of employees teleworked in April. Millions of jobs necessitate in-person interactions. Retail, manufacturing and essential-services workers such as supermarket and hospital staff and public-transport employees put their lives at risk during the pandemic.
Remote work is a tradeoff for everyone
As managers negotiate with office workers, companies are negotiating with landlords about their office leases. In Manhattan, monthly leasing activity decreased by 11.5% month-over-month to 2.7 million square feet in April, Colliers said. However, companies seem to be betting on some kind of return to office life: Demand more than doubled year over year.
Herd, however, said managers will soon see the advantage of remote work. “E-commerce killed physical stores because people prefer to shop online, it gave them more choice, it was more efficient and costs less,” he said. “E-companies kill office-based companies because workers prefer to work online, it gives them more choice, it is more efficient and costs less.”
It’s obviously not a one-size-fits-all question, even for those who have had the luxury of working from home. “For me, in the mental-health counseling field, I can see both sides,” said Ken Steinbach, a Portland, Ore.,-based counselor. “There is a special connection when we are in the same space together face to face, and I would love to be able to connect that way again.”
“The reality is that most of my clients might not be able to have therapy if they had to block out time to go into an office,” Steinbach told MarketWatch. “Working virtually has made my services much more accessible to a great many people and I can’t see that changing. So yes, I love the idea of being in person, but that may not be the world we live in.”
Peter Gray, professor of commerce at the University of Virginia, said workers miss out on the emotional, social and intellectual stimulation that comes with being around others. For that reason, he favors a hybrid work model. “Employee resistance is to me perfectly natural when people believe that they can be just as effective at home as in the office,” he said.
But spending all that time working from your sofa or kitchen table or — if you’re lucky enough to have one — a home office may be a more expensive tradeoff for employees and management than they anticipate. “What they don’t realize is that their networks will slowly shrink as they spend more time at home, and this can hamper their effectiveness long term,” Gray said.
“Once they realize that some of the rich interactions they used to have in the office have faded, they start to wonder if they might be missing something important,” he added. “And as their broader networks shrink — the ones that expose them to creative new ways of thinking outside of their main work stream — their performance can suffer.”
The resistance appears to be winning
Another obstacle: An empty or half-empty office doesn’t help new employees or interns who rely on those face-to-face interactions for honing their skills and, critically, building a professional network so they can move up the corporate ladder and/or put their name in the hat for a promotion. For every seasoned employee who knows the ropes, there are others who need to be given a helping hand.
Skeptics also worry that some people may be tempted to take advantage of remote work, spend an hour or two catching up on their favorite TV show, while keeping a casual eye on their work emails, or — worse — take the entire day off and go to the beach, while answering the occasional Slack message from under an umbrella. In fact, eight out of 10 workers have admitted to slacking off.
Burbano, the Columbia Business School professor, is not surprised by such polls. “Remote work also comes with increased opportunities for worker misconduct, worker shirking and putting in less effort, as my research has shown, which is likely part of the reason that there is a desire amongst employers to bring people back to the physical office.”
Social media is filled with people claiming they will point-blank refuse to commute again. “I’m not going back to the office with these gas prices,” one person recently wrote on Twitter
TWTR,
+2.68%.
“The gas people and the commercial real-estate people are just gonna have to fight it out amongst themselves.” Another added bluntly: “Not in the mood to work or be around people.”
Recent research suggests such resistance is winning. The Conference Board, a nonprofit organization, says only 4% of companies are requiring staff to return to work full time and only 45% were requiring them to work five days a week from the office — even if a few days a week appears too much for some Apple employees and workers like Amy Faust Liggayu.
Faust Liggayu doesn’t fully buy the brainstorming-by-the-watercooler argument. “At my previous job, we had a meeting every morning to go over the workload for the day. That meeting would sometimes last an hour because we would just bulls*** about everything. But if you have enough calls where you can be spontaneous and a good team that works together well, you can still have that environment.”
And now? She is much happier at her new fully-remote, better-paid job. “I make a point of remembering what people are up to and ask them about their plans for the weekend to keep that community together,” she said. “I love it. I officially turned one of our extra bedrooms into an office. I get to spend my lunch with my son, feed him when he’s hungry. The flexibility is incredible.”
Amy Faust Liggayu: ‘I officially turned one of our extra bedrooms into an office.’
Today’s home buyers could be in for a shock when the tax man comes calling.
In 2021, around $328 billion in property taxes were imposed on single-family homes across the country, according to a new report from real-estate analytics company Attom Data Solutions. Growth in property taxes decelerated last year, despite the run-up in property values, suggesting that bigger tax bills could be coming down the pike.
Between 2020 and 2021, the amount levied in property taxes only grew by 1.8% on average, representing the second smallest annual increase over the past five years.
“It’s hardly a surprise that property taxes increased in 2021, a year when home prices across the country rose by 16%,” Rick Sharga, Attom’s executive vice president of market intelligence, said in the report. “In fact, the real surprise is that the tax increases weren’t higher, which suggests that tax assessments are lagging behind rising property values, and will likely continue to go up in 2022.”
The rise in home values, which far outpaced the increase in taxes, means that the effective tax rate last year actually decreased to 0.9% from 1.1% the year before.
But in most markets, property taxes increased faster than the national average. The largest increase occurred in Nashville, where property taxes surged 27% on average. Milwaukee was next with an 18.6% uptick in property taxes, followed by Baltimore and Grand Rapids, Mich.
Cities where property taxes declined in 2021 include Pittsburgh (down 35.1%) and New Orleans (down 20.1%). Multiple cities in Texas — Houston, Dallas and Austin — also saw marked decreases in the average property tax bill.
At the state level, Illinois had the highest effective tax rate in the country at 1.86%, followed by New Jersey at 1.73%. Notably, New Jersey had the highest average property tax bill for single-family homes in the country at $9,476. Generally, metro areas in the Northeast and Midwest saw higher property-tax rates than the rest of the country.
The potential for taxes to rise significantly in the future could come to represent a major concern for home buyers at a time when mortgage rates have soared to 5%.
“Prospective homeowners often fail to include property taxes when considering the cost of homeownership,” Sharga said in the report. “But, especially in some of the higher-priced markets across the country, property taxes can add thousands of dollars to annual ownership costs, and possibly be the difference between someone being able to afford a home or not.”
WASHINGTON—Regulators are carrying out a sweeping investigation of conflicts of interest at the nation’s largest accounting firms, asking whether consulting and other nonaudit services they sell undermine their ability to conduct independent reviews of public companies’ financials, according to people familiar with the matter.
The Securities and Exchange Commission probe highlights the agency’s new focus on financial-market gatekeepers such as accountants, bankers and lawyers. These firms help companies raise capital and communicate with shareholders, but also have duties under federal investor-protection laws. Auditors are a shareholder’s first line of defense against sloppy or dodgy accounting.
WASHINGTON—Regulators are carrying out a sweeping investigation of conflicts of interest at the nation’s largest accounting firms, asking whether consulting and other nonaudit services they sell undermine their ability to conduct independent reviews of public companies’ financials, according to people familiar with the matter.
The Securities and Exchange Commission probe highlights the agency’s new focus on financial-market gatekeepers such as accountants, bankers and lawyers. These firms help companies raise capital and communicate with shareholders, but also have duties under federal investor-protection laws. Auditors are a shareholder’s first line of defense against sloppy or dodgy accounting.
We are well into tax season. But if you’re a busy self-employed sole proprietor, partner, or LLC member, you might not have gotten around to filing your 2020 Form 1040. If so, you are forgiven. The good news: if you’ve stayed on the sidelines so far, it could actually turn out in your favor — because there are some new tax breaks that you may be blissfully unaware of. Here’s the story on two important ones. Take advantage if you can.
Defer some self-employment tax
If you’re self-employed, you know that the self-employment (SE) tax can take a big bite out of your wallet every year. Ouch. Thankfully, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) allows you to defer half of your 2020 liability for the 12.4% Social Security tax component of the SE tax for the deferral period. The deferral period began on 3/27/20 and ended on 12/31/20. You must then pay the deferred SE tax amount in two installments:
Half by 12/31/21
The remaining half by 12/31/22
If you’re cash-strapped, this can be a very helpful deal, and you should take full advantage.
If you owe the maximum $17,075 for the 2020 Social Security tax portion of the SE tax, it works out that you can potentially defer up to half of that amount, or $8,537. You would then pay in $4,268.50 by 12/31/21 and the remaining $4,268.50 by 12/31/22.
Tax-saving tip: Fill out Part III of Schedule SE to calculate the exact amount that you can defer. Then carry the deferred amount to Schedule 3 of Form 1040 where it’s treated as a credit that reduces your 2020 federal income tax liability on page 2 of your return. Done.
Claim tax credits for COVID-19-related sick leave and family leave taken last year
The Families First Coronavirus Response Act (FFCRA) granted two separate 2020 federal tax credits to small employers to cover: (1) mandatory payments to employees who took time off between 4/1/20 and 12/31/20 under the FFCRA’s COVID-19-related emergency sick leave provisions and (2) mandatory payments to employees who took time off between those dates under the FFCRA’s emergency family leave provisions.
Somewhat surprisingly, equivalent tax credits are available to you as a self-employed individual if you took days of qualified sick leave or qualified family leave between 4/1/20 and 12/31/20. In effect, you can claim credits for amounts that you paid to yourself for: (1) qualified sick leave days and (2) qualified family leave days. Nice. Here’s what you need to know to cash in.
Sick leave credit details
The sick leave credit is allowed for sick leave days that you took between 4/1/20 and 12/31/20. The daily sick leave credit equals: (1) 100% of the daily sick-leave equivalent amount plus (2) 67% of the daily sick-leave equivalent amount if you took leave to care for a sick person or to care for an under-age-18 son or daughter following the closing of the child’s school or place of care or because the childcare provider for the child was unavailable due to COVID-19 precautions.
The daily sick-leave equivalent amount equals the lesser of: (1) your average daily self-employment income or (2) $511 per day for up to 10 sick days (up to $5,110 in total) to care for yourself or $200 per day for up to 10 days (up to $2,000 in total) to care for another sick person or to care for an under-age-18 son or daughter for any of the aforementioned reasons.
Average daily self-employment income means your net self-employment earnings for 2020 divided by 260.
Family leave credit details
The separate family leave credit is allowed for family leave days that you took to care for an under-age-18 son or daughter between 4/1/20 and 12/31/20 following the closing of the child’s school or place of care or because the childcare provider for the child was unavailable due to COVID-19 precautions.
You can claim the family leave credit for a maximum of 50 days. The allowable credit equals the number of qualified family leave days multiplied by the lesser of (1) $200 or (2) your average daily self-employment income.
The maximum total family leave credit is $10,000 (50 days × $200 per day).
Once again, average daily self-employment income means your net self-employment earnings for 2020 divided by 260.
Keep documentation
You should maintain documentation to establish your eligibility for these credits. According to the IRS website:
If you took sick leave days for yourself based on a quarantine order or advice to self-quarantine, document the name of the governmental entity ordering quarantine or the name of the health care professional who advised self-quarantine. If you took sick leave days to care for another person who was subject to quarantine or advised to self-quarantine, document the other person’s name and relationship to you.
If you took family leave days to care for an under-age-18 son or daughter due to a school closing or child care facility closing or child care provider unavailability, document the name and age of the child; the name of the school, summer camp, summer enrichment program, or other summer program that was closed; or the child care facility that was closed; or the child care provider who was unavailable. Be prepared to state that no other person cared for the child during the days you took family leave.
Tax-saving tip: These two credits are so-called refundable credits. That means you can collect them even if you don’t have any federal income tax liability for 2020. But you must file your 2020 Form 1040 to cash in. First, calculate the credits on new IRS Form 7202 (Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals). Then carry the credits to Schedule 3 of Form 1040 where they are treated as refundable credits on page 2 of your Form 1040.
Another tax-saving tip: You can elect to use your 2019 net self-employment earnings to calculate your average daily self-employment income for purposes of calculating these credits. Do that if it would result in bigger credits. To make the election, simply enter the larger 2019 amount of net earnings from self-employment on Form 7202.
The bottom line
The COVID-19 pandemic, its economic fallout, and available federal income tax relief can make your 2020 Form 1040 a whole new ballgame. This column addresses two important considerations for self-employed individuals, but there are more. Your tax professional can work with them to optimize your tax-saving results for a year we would all like to forget.
