.McQuade.Brennan.LLP.

On Monday, October 11, 2010, Thomas Heath commented on “The Intelligent Entrepreneur: How Three Harvard Business School Graduates Learned the 10 Rules of Successful Entrepreneurship”, a book written by Bill Murphy, a former Washington Post reporter and aspiring entrepreneur. 

Murphy’s 10 rules for success include:

1.) Be committed to entrepreneurship, the act of creating something, rather than a single idea.

2.) Solve a problem.

3.) Think big. Think new. Think again.

4.) You can’t do it alone.

5.) You must do it alone. Be decisive.

6.) Manage risk.

7.) Lead.

8.) Learn to sell.

9.) Persistence is everything.

10.) Time, not money, is the key resource.

I work with many small- and medium-sized businesses.  I’ve seen the bad, the good and the ugliest of outcomes from entrepreneurship.  Murphy is right “you can’t do it alone”.  Your support team should not only consist of a business partner and trusted friends, but also a trusted financial advisor to help you construct a business plan.  A lot of entrepreneurs have good ideas, but formulating a business plan is outside their skill set.   A financial advisor can give a clear description of how one will make money, including a time table of when the cash flow is going to start and what is the expected rate of return.  You need to have an advisor that’s going to explain to you the facts of life – not tell you what you want to hear.  They’ve got to tell you the bad news and the good news. 

Lastly, you must work hard and hire the best and brightest people you can find.

On September 8, 2010, Obama proposed a 100 percent bonus depreciation tax incentive for 2011 and asked Congress to make the research-and-development (R&D) tax credit permanent.

Obama proposes to increase the current 50% bonus depreciation deduction to 100%, retroactive to September 8, 2010. This deduction applies to purchases of equipment such as vehicles, solar panels, and computers.

The Administration hopes to encourage business investment and support the business community by making the R&D tax credit permanent and increasing bonus depreciation.

Don’t buy any equipment just yet. We’ll inform you once Congress has voted.

A number of our clients have run into a brick wall trying to secure working capital and lines of credit from their bank. Large and small banks underwriting for small business loans have become increasingly stringent. Banks reluctance to lend money is understandable, given the increased regulatory pressures on banks and the financial impact of the poor economy on the balance sheets of many of our clients.

McQuadeBrennan’s pro-active client services have found an interesting solution to the lack of credit available to many of our small business clients, non-profit associations, and private equity managers.

The Receivables Exchange is an online service that matches investors (lenders) with companies and organizations that seek to liquefy its receivables. The Exchange is an innovative cash flow solution that assists company’s access to work capital. The New York Times referred to The Receivables Exchange as the “eBay of working capital.” Here’s how it works. Let’s say you are a non-profit organization with recurring (or nonrecurring) receivables from long standing members that may be getting old for some reason. After you have registered as a client of The Receivables Exchange, you would post the dues, or accounts receivable, you want to liquefy. Investors will complete for your business by effectively bidding an interest rate for the receivables you posted with The Exchange. The average rate charged to participants in The Exchange is 1 ½% per month, but your initial transactions may be more expensive until investors get comfortable with your organization and track record.

The investors who supply the liquidity are largely institutional, and include hedge funds and investment banks. An account is established in your organization’s name at JP Morgan, and you direct your receivable to make payment directly to the account, so you maintain complete confidentiality.

The application process is fairly extensive, but after you are up and running, the posting of receivables and cash transfers becomes fairly routine.

Coming down the pipeline and ignored by Congress, is a waterfall of potential tax increases, the likes of which we haven’t seen for a decade. The massive amounts of legislation this year coupled with sunset provisions create a perfect storm for taxpayers.

The recent healthcare legislation was also a tax bill. From a new tax surcharge on tanning salons, all the way to altering the way millions of Americans purchase medications. If you have grown used to using your flexible spending account (FSA), health savings account (HSA), or a similar vehicle for non-prescription medications – other than insulin, these medications will now have to be purchased with after-tax dollars.

The healthcare legislation also limits the dollars that can be placed in an FSA to $2,400, drastically limiting the tax advantages. This limitation will have a particularly severe impact on disabled individuals and parents of disabled children who have used pre-tax dollars to pay for expensive treatments, medical devices, and related education.

After January 1, 2011, it will be much more expensive to die; the “Death Tax” returns, taxing up to 55% on an estate of $1 million, a threshold that will be surprisingly easy to reach.

The tax ratio in effect since the early 2000s will be rolled back: the lowest bracket will go from 10% to 15% and the highest from 35% to 39.6%. This will be in addition to narrower tax brackets for taxpayers filing jointly, a significantly lower child tax credit, lower adoption credit, lower dependent care tax credit, and a lower standard deduction.

Retirees will pay both higher capital gains tax, going from 15% to 20%, and higher taxes on dividend income, going from 15% to 39.6%. Charitable contributions from IRAs will be discontinued, and rules governing student loan interest deductions are changing, for the worse.

There’s more.  If you currently receive health insurance, your W-2 will show a big gain next year, but not in a good way. You will magically have more gross income, monies that you never saw, that went to purchase health insurance will now be taxable income; this has the potential to push taxpayers into higher brackets even though they never saw any additional net earnings.

Businesses will also be hit with tax increases with significant changes in what can and cannot be deducted. Business tax brackets are set for a similar shift as individual taxpayers. Small, job creating, businesses that are used to expensing equipment purchases up to $250,000 will see the decimal in a different place as the ceiling decreases to a mere $25,000. One of the most notable business tax credits that is being eliminated is the research tax credit, although it has repeatedly been extended, its political future is unsure at best. There are a plethora of other changes, and their implementation and enforcement specifics are still up in the air. 

Finally, Congress has repeatedly raised the Alternative Minimum Tax dollar threshold, which is not tied to inflation, and is likely to do so in the future.  As of today, many middle class taxpayers are subject to this “backup tax” in 2011. 

Hopefully, Congress will scrutinize many of these tax increases.  Though they were designed to pay for current legislation, the political will to maintain them is questionable. The tax code is tedious, but it is changing quickly, and will continue to do so. We’ll keep you posted.

As we sort through the wreckage of the housing bubble, I see another, similar bubble emerging: a student loan crisis.  Fueled by a combination of low lending standards, unrealistic expectations and the proliferation of for-profit universities, this crisis is likely to cost banks and the federal government significant sums of money.  It will also leave borrowers subject to crippling debt for decades after they receive their degrees.

Americans have come to expect they should own a home and receive a college education (next up, health care).  Actually being able to pay for either has not been part of the decision-making process.  Financial institutions, chasing fees and government guarantees, are following the same path they took on their subprime mortgage adventures.  The economy is producing fewer jobs and its impact on students’ ability to repay their loans is similar to subprime mortgage borrowers.  No job.  No loan repayment.  Worse, because student loan debt is generally not discharged by bankruptcy proceedings, students may labor under this debt for decades after graduation.  

The debt incurred by students attending for-profit institutions and subprime mortgage loans are eerily similar.  Both the subprime mortgage industry and for-profit college universities rely on loans made to low-income borrowers who are less likely to be able to meet their obligations.  (Phoenix University, for example, relied on $1.8 billion in federal student aid last year.)  Repayment of subprime mortgage loans requires a housing market that continuously appreciates.  Repayment of debt to pay for-profit school tuition requires that students obtain good paying jobs upon graduation.  In fact, many students who borrow money for tuition never receive a degree. (By one count Phoenix University has an 86% drop-out rate.) In both situations, taxpayers bear the cost of defaults. 

The bail out of subprime mortgage borrowers is costing hundreds of millions of federal dollars and for-profit tuition debt will cost the taxpayer as well.  Some industry analysts predict that defaults of for-profit university tuition debt could exceed $275 billion in the next ten years. 

On May 6, 2010, Michael Boskin wrote an opinion piece in the Wall Street Journal about the largest impediment to growth in the U.S., the corporate income tax.  I previously addressed the same subject in February 2009 and essentially presented the same facts regarding the District’s corporate income tax and its hindrance to job growth.

Not only is the corporate income tax harmful to economic growth, but its existence results in wasteful distortions of assets, cash flow, and, of course, wages. As a CPA who has witnessed the constant tinkering of the tax code over the years, I can vouch for the argument that economic distortions are regularly undertaken by clear thinking business men and women in the pursuit of tax avoidance.

To date, politicians have been unable to accept the premise that less is more when it comes to corporate income taxes, at the state or federal level. Corporations are job machines. To discourage corporate formation or growth is to discourage job growth. It’s a real shame that the District doesn’t exploit its extraordinary advantage as the center of the free world.;”>

The elimination of the D.C. corporate income tax would have an astonishing impact on job growth in the District. Remember Northrop Grumman? They did a brief fly over, saw the District’s 9.975% tax, and promptly set-up shop in Virginia.

This audit season has been a learning experience for many of our young staff. They have been introduced to the obscure and rarely applied accounting dictum known as impairment. As we all know, Washington real estate had been the road to riches for many investors. The stability provided by the Federal government and legions of lawyers and consultants who feed at the public trough has provided the D.C. real estate market with stability unlike any other market place. Until now. The recent sale of the Mortgage Bankers Association’s headquarters to CoStar Group gave new insight into the meaning of impairment.

Our audit staff has had numerous, awkward conversations with our real estate clients regarding the real value of their investments. In a number of cases, we have come to the conclusion (which, our clients reluctantly agreed) that the historical cost of certain real estate investments carried on some entities’ books is significantly higher than its net realizable value.

In 30 years of practicing in this town, I have never witnessed a situation like the one we are in. The late 80’s was tough, but brief. This environment seems to drag on, with no end in sight. The market needs equity, and more cooperation from banks and financial institutions to get deals done.

Capital investment is the heart of job growth and there is little of it going on now.

On Thursday, March 18, 2010, the IRS announced two new tax benefits available to employers hiring workers who were previously unemployed or only working part time. These provisions are part of the new Hiring Incentives to Restore Employment (HIRE) Act.

Payroll Tax Incentive

Employers who hire unemployed workers after Feb. 3, 2010 and before Jan. 1, 2011 may retain the employer portion of the Social Security tax ordinarily paid. Employers are exempt from paying their 6.2 percent of Social Security taxes on wages paid after March 18, 2010.  This reduced tax withholding will have no effect on the employee’s future Social Security benefits, and employers would still need to withhold the employee’s 6.2 percent share of Social Security taxes, as well as income taxes. The employer and employee’s shares of Medicare taxes would also still apply to these wages.

New hires filling existing positions also qualify, but only if the workers they are replacing left voluntarily or for cause. Family members and other relatives do not qualify.

In addition, the new law requires that the employer get a statement from each eligible new hire certifying that he or she was unemployed during the 60 days before beginning work or, alternatively, worked less than a total of 40 hours for someone else during the 60 day period. The IRS is currently developing a form employees can use to make the required statement.

Businesses, agricultural employers, tax-exempt organizations and public colleges and universities all qualify to claim the payroll tax benefit for eligible newly-hired employees. Household employers cannot claim this new tax benefit.

Employers may claim the payroll tax benefit on the federal employment tax return they file quarterly with the IRS. Eligible employers will be able to claim the new tax incentive on their revised employment tax form for the second quarter of 2010.

 Section 179 Deductions Extended

Are you considering purchasing new office computers or furniture? Well, you’re in luck! The HIRE Act also extends Section 179 for one year.  Visit our previous blog post to determine qualifying property.

The New Year brings five significant changes to consider as you prepare your 2009 federal income tax return.  These changes generally provide opportunities to decrease overall tax liability through increased deductions, taxpayer credits and more. 

When preparing your 2009 return consider these five changes:

1. The American Recovery and Reinvestment Act (ARRA) provides significant incentives for taxpayers. These include: 

- Those purchasing a home or improving energy efficiency.

- Those purchasing a car.

- Parents and students paying for college.

2. Expansion of IRA deduction to those covered by a retirement plan with adjusted gross income of less than $65,000 (single) or $109,000 (married filing jointly).

3. Increase in the Standard Deduction to $11,400 for those married and filing jointly, and $5,700 for singles and those who are married and filing separately.

4. Change to the standard mileage rate to $.55 per business mile.

5. Increase of investment income a child may receive ($1,900) without being taxed on their parents’ return.

The Small Business and Entrepreneurship Council (SBE Council) released the 14^th annual Small Business Survival Index 2009: Ranking the Policy Environment for Entrepreneurship Across the Nation. The index ranks states based on their public policy conditions for small businesses and entrepreneurship. Hometown Washington, D.C. was ranked dead last this year and Maryland, not much better, was ranked 37^th. However, Virginia was ranked 10^th.

The rankings are based on taxes, regulatory costs, government spending, property rights, and health care and energy costs to determine which states are the friendliest to small businesses. Virginia’s success is easy to explain – low tax rates. D.C. and Maryland refuse to address their job killing corporate tax rates. Around this time last year, I made a case for the elimination of the D.C. corporate income tax.

When pigs fly…

Click here to view the complete report.