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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.

I picked up an Apple iPad about a month ago. It’s great. I strongly recommend you give it a test drive when you get chance. For business types like me, the ability to toss the iPad in my briefcase is extremely convenient. It’s a truly portable device. You can actually read attachments to emails without a microscope, unlike my Blackberry. Newspapers are in color and the presentation is light years better than the Kindle. A friend of mine was in the grill room at Columbia CC the other day having a beer, reading his iPad – an interesting sight. It was obvious to me that the “tablet” computer is going to change how we do a lot of things. When Apple adds a phone and camera to the iPad, watch out.

(c) ISAMU SANADA

The iPad and its successors will probably accelerate the demise of the print version of newspapers, because they provide such a good reading experience and offer the same portability. Textbooks are next. The tablets are going to be game changers.

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 discussion of for-profit universities continues in a recent New York Times editorial: Who Profits? Who Learns?. 

It reiterates many abuses by these schools including high student debt-to-income ratios, low graduation rates, and reliance on federal student aid for the bulk of their revenue. We’ve discussed these concerns in more detail previously (The Next Big Short – the For-Profit Colleges).  This editorial outlines proposed rules that seek to protect students and limit federal funding to for-profit schools.  Provisions include oversight of the student recruiting process and licensure of for-profit universities.  See our previous post for a detailed review of the proposed rules. 

This environment presents an excellent investment opportunity – short Appollo, DeVry and Capella.

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

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.

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.

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.