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Effective August 2, 2010, the District of Columbia announced taxpayers have a one-time opportunity to have penalties and fees waived upon the payment of overdue DC taxes and interest without fear of criminal penalties. The amnesty program ends September 30, 2010.

Individuals and businesses with unpaid DC tax obligations relating to returns with a due date prior to December 31, 2009 are eligible to participate. Real property taxes and the ball park fee are not eligible for the amnesty program.

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.

The Apollo Group, which is the parent of the for-profit internet college the University of Phoenix, announced third quarter earnings this morning.  Earnings per share increased 34% on a year-to-year comparison.  No surprise here, considering its student body is the largest beneficiary of federal student aid (to the tune of 1.8 billion last year).

However, the company also told analysts that it expects enrollment growth to decelerate, noting the regulatory/legislative environment.  They also noted that the incentive compensation paid to its recruiters (brokers) is being restricted, because of regulatory pressure.  And here’s the big one…the Apollo Group disclosed that many of its programs would fail to comply with the Department of Education’s proposed gainful employment rules. The gainful employment proposal would cut federal aid to schools whose graduates would spend more than 8% of their starting salary on loan payments.  If enacted, Apollo Group’s operating costs could significantly rise and enrollment could be reduced.

The horse is out of the barn, and well down the road.  So naturally the analyst’s are doing their best moonwalk impressions.  Barrington reduced its 12 month target for Apollo Group from $75 to $65, and FBR lowered their target price from $63 to $49.

Hey guys, Apollo Group is trading at $42 and change this morning, and Senator Harkin, Chairman of the Senate Committee on Health, Education, Labor and Pensions, is on the warpath. The for-profit higher education industry will soon be facing new and stringent standards that many schools will fail to comply with.  Do your clients a favor. Take another look at your numbers.  They’re too high.     

President Obama has called for the U.S. to lead the world in having the highest percentage of college graduates by 2020. In a similar manner, President Clinton stated a key goal of his administration was to increase home ownership to millions of Americans. Both of these initiatives have a common revenue source…Uncle Sam. The now bankrupt Fannie Mae and Freddie Mac eagerly accepted President Clinton’s challenge and helped fuel the housing boom of the last decade. Financing to buy a home was made available to almost everyone, irrespective of their ability to actually repay the loan.

The internet colleges are the latest industry group whose primary source of income is funded or guaranteed by the federal government. And for many of these schools, their revenue is almost exclusively from federal grants and loans. More students, more money. All employ recruiters who essentially serve the same role as the mortgage broker for the home builders. Does anyone believe the feds are capable of monitoring the internet school recruiters (brokers) better than they did the mortgage industry?

The dropout rate and the student loan default rate of internet students makes the subprime defaults look modest by comparison. Well, the good news is Congress may be wising up. Memories of Barney Frank on You Tube defending Fannie and Freddie despite their deteriorating balance sheets may be keeping some legislatures up at night. The White House is backing off its lofty goals of a college degree in every pot, and recently announced it is pressing for increased oversight of recruiters (brokers). Congress announced it will hold hearings on how the for-profit schools use federal aid. All of this is very bad news for the internet schools, and their investors.

Check out the price action of the following publicly traded for-profit/internet schools over the past month:

                                                                                                June 1                   June 29

The University of Phoenix (Apollo Group)          51                              43

DeVry University                                                            57                              53

Kaplan (The Washington Post)                                  451                          412

Capella University                                                          84                              79

Morgan Stanley’s Steven Eisman, who was described in Michael Lewis’ “The Big Short”, for warning investors early on about the subprime mortgage market, has said the following: “Until recently I thought there would never again be an opportunity to be involved with an industry as socially destructive and morally bankrupt as the subprime mortgage industry. I was wrong. The for-profit education industry has proven equal to the task.”

Ouch.

Have you noticed the D.C. bag tax every time you purchase a drink or grab a bite to eat?

As of January 1, 2010, consumers at grocery stores and other food and alcohol retailers in Washington, D.C. must pay a new five cent tax on the use of plastic and paper bags.  The tax, mandated by D.C. Council legislation, is the only active bag tax that exists in the United States today.

The primary purpose of the tax is environmental, with 80% of the tax going to a fund dedicated to cleaning up the Anacostia River.  In addition, lawmakers hope that the tax will reduce paper and plastic litter, which accounts for 21% of the trash in the Anacostia River and is often the cause of blocked street drains.  Store owners, who are responsible for collecting the tax, may keep one cent for every bag distributed. Retailers that provide incentives to their customers to bring reusable bags can retain an extra cent.

Lawmakers estimate that the tax will generate $3.6 million in revenue this year, an amount that will likely decline in future years as a growing number of consumers will begin using reusable bags.  Nonetheless, some taxpayers remain displeased and skeptical, pointing to the failure of a similar tax program in San Francisco where the government  proposed 17 cent tax for plastic bags. Critics argue now is a bad time to impose a bag fee when every penny counts.

Currently, there are approximately 200,000 riders and 4,000 employers participating in Metro’s SmartBenefits program. The program allows employees to set aside of a portion of their salary, before taxes, for transit expenses. Metrorail, Metrobus and regional bus fares, parking at Metro lots and registered van pool expenses are loaded onto a SmartTrip card each month at vending machines located in Metro stations.

Metro has proposed the following program changes:

- Workers would be required to set an amount for transit rides and transit parking, a new requirement.

- Unused transit and parking benefits for the month would be returned to the employer, instead of rolling over. This change upset many employees, since some employers had decided to keep the funds and not credit employees.

- Riders will not need to visit vending machines each month to download their benefits. Instead, the transaction will occur at the fare gate, bus box, or parking exit. The program will use the new cards like debit cards, deducting used amounts from the benefit amount set aside for the month.

These changes were going to be effective Jan. 1st, but due to the volume of complaints from employers and employers, Metro has decided to postpone the transition another year to give employers and employees more time to review the proposed changes to the program.

IRS has agreed to the extension although a formal request is pending. Metro says the changes are needed to protect the benefit system from misuse and that the additional time will allow them to make other planned improvements to the program as well.

Congress Extends First-time Homebuyer Credit

Congress has extended the first-time homebuyer tax credit into the first half of 2010. The credit was scheduled to expire after November 30, 2009. The extension increases the income phase out amounts and includes current homeowners in some benefits.

According to trade reports, the first-time homebuyer credit has generated more than 300,000 home sales above otherwise expected sales, helping to reduce excess new construction inventory.

First-time Homebuyer Credit

The original first-time homebuyer credit rewarded eligible individuals with a tax credit worth 10% of a home’s value up to a maximum credit of $8,000 after the purchase of a qualified residence. The credit phased out for single individuals with modified adjusted gross incomes (MAGI) in excess of $75,000 and for married couples filing jointly with MAGI above $150,000. Qualifying buyers could purchase a property with a maximum price of $800,000.

Extension Terms

The new legislation extends the beginning November 7, 2009 through June 30, 2010. To qualify, sale contracts must be issued by April 30, 2010 and the sale must close by June 30, 2010.

Increased Income Limits

Single individuals may earn up to $125,000 to be eligible for the total credit amount. Joint filers may earn up to $225,000 to be eligible for the total credit amount.

Current Homeowners

Current homeowners can benefit from a maximum $6,500 tax credit, if they have occupied their primary residence for a period of five consecutive years during the last eight years.

Tax Credit Abuses

The news is not all good. The IRS is reportedly investigating more than 100 civil fraud cases related to the first-time homebuyer credit. In some cases, the IRS is pursuing criminal charges.

A government watchdog told Congress in October that the IRS has paid more than $400 million in bogus claims for the first-time homebuyer credit. Congress has instructed the IRS to crackdown on abuses. The IRS is expected to heighten the substantiation requirements for the credit.

President Obama’s proposed restructuring of the health care system will dramatically change the way health care is delivered in the United States. His proposed plan can be broken down into three parts: quality and affordable care and coverage for all; modernizing the current health care system in order to lower costs; and strengthening existing public health care services. All are worthy objectives, even under our current health care system. Under the President’s plan, however, the practice of medicine will change significantly from our current market based system to a universal care system. The debate is contentious in the Congress, and by the public and health care industry, on how to best achieve the President objectives.  

The greatest impact of the President’s plan will be on the primary-care physician, since these are the physicians we rely on for our immediate care and for referral to specialty care. Currently, there is a shortage of primary-care physicians in the U.S. since more and more physicians are entering the specialty fields of medicine.  Without an increase in primary-care physicians, millions of new enrollee’s needing care will find it more difficult to access a physician and medical care.  Additionally, under the President’s plan, all physicians will certainly see an increase in the expenses related to new patients, complying with new regulations, and with implementing new information technology requirements in order to meet new Federal mandates. Like Medicare and Medicaid, physicians under the new universal health care program will be restricted to charging fees based on what the government establishes as a “fair and reasonable” charge…effectively, a pay cut for the physicians. As a result, primary-care physicians may consolidate their practices with other physicians in order to reduce costs.  Eventually, the increasing costs of medical care for millions of new enrollees for universal care will lead to rationing, as evidenced by the British and Canadian health care systems.  Patients in this country will look to other foreign providers for surgeries and treatments if care becomes expensive or constrained in this country since medical technology and care abroad, in many instances, is comparable to care in the U.S.     

A fundamental problem with the Presidents plan is the premise that medical/health care is a “right” to be guaranteed by the Federal government.  Health care is a “need” not a “right”.  The debate on the President’s plan continues. It seems to many in the health care debate that the only way to control the cost of millions of new enrollees is to pay doctors less, or increase the cost (i.e. taxes) of that care on individuals and businesses. Let’s hope that the Congress understands what complete government control over healthcare programs really means for our country.     

Read more on the subject by following this link to Dr. Scott Gottlieb’s Wall Street Journal Opinion piece, “How ObamaCare Will Affect Your Doctor”.

I recently received a promotion in the mail encouraging me to leave Chevy Chase, Maryland to enjoy the lower taxes in Rehoboth, Delaware.  Here’s how the following localities’ tax burdens compare:

Maryland and the District of Columbia continue to deny the mobility of businesses and their citizens.  Delaware will continue to gain population and jobs at the expense of both, as well as neighboring New Jersey, which has one of the highest state tax rates in the country.

I wrote the following piece with Ms. Kate Carr, President, Cardinal Bank DC.   The Washington Post published the piece, “How to Make D.C. an Economic Powerhouse (Hint: Tax Less)”, in the Outlook Section, Close to Home editorials on Sunday, February 8, 2009. As business leaders in the District, we can’t underestimate the importance of our proposal to the business community.  

No Corporations Need Apply 

The economic crisis has forced state and local governments throughout the country to review their increasingly stressed budgets and seek new sources of revenue. In December, the District’s unemployment rate hit 8.8 percent, compared to the national rate of 7.2 percent, a 16-year high. Personal income taxes provide the city with 17 percent of its revenue, its largest single revenue source. By contrast, corporate and franchise taxes are projected to make up just 4.3 percent of the District’s revenue in 2009.    

In considering its own stimulus package, the D.C. Council should review the structural impediments to job growth in the District. How can the District position itself to take advantage of the enormous opportunities presented by the federal government’s role as the world’s largest financial shareholder and general contractor since the New Deal?    

For-profit corporations are painfully absent from the District’s economic landscape. At 9.975 percent, the District has the third-highest state or local corporate tax rate in the country. For a company considering operating in the District, it’s an absolute deal-breaker. Economists have noted for years the phenomenon that higher tax rates often result in lower tax revenue. The District’s corporate tax policies have the same impact on its economic growth and diversification that NINA (“No Irish Need Apply”) signs had on the unemployed Irish in the 1900s: Don’t bother operating a business in the District. Our tax rates will make sure you’re not competitive.    

The D.C. Council would be wise to consider the expanded role of the U.S. government in managing the largest economy in the world, and what that role could mean to the District. The stimulus package now before Congress will dwarf those of the New Deal. And it’s likely to attract institutions and corporations from around the world who want to participate in the massive spending involved. The Tax Foundation, a nonpartisan policy research group, consistently rates neighboring
Virginia as having one of the most favorable corporate tax environments in the nation. (The District and Maryland are consistently among the worst.) Tysons Corner has plenty of capacity to handle the expected influx of businesses wanting to do business with the U.S. government, and Virginia is ready to accommodate them and their jobs.    

Eliminating the District’s corporate income tax could have a profound impact on the future of the District. Job growth, increasing property assessments, and revitalization throughout the city would be immediate. The economic crisis and the role the federal government is expected to play in the country’s recovery present the District with opportunities that no other city in the country has. Think Dubai; it has oil. The District has the federal government. The District’s tax structure, especially its corporate tax, prevents it from assuming a position of economic leadership in the region and the country. Markets are mobile, and businesses will locate where they have the greatest economic advantage. The District needs an economic advantage.    

The national crisis needs a deliberate, quick and bold response. If the District doesn’t act soon, it may as well post signs on all major roads into the city: No Corporations Need Apply.                 

- Brian McQuade

- Kate Carr