As most of you know, the estate tax rates for 2010 remain at 0%. At the beginning of 2011 those rates jump up to 55% with a $1,000,000 exemption. Those are basically the rates in effect before the 2001 changes began phasing out the estate tax altogether only to be reinstated in 2011. In effect, if you died in 2010 with a substantial estate, as George Steinbrenner, Dan Duncan and Walter Shorenstein did, the potential savings could be in the 100’s of millions.

Wall Street Journal estimates are as high as $600 million on Steinbrenner alone. Of course this assumes no elaborate trust work or tax free foundations etc. were used. Additionally, taxes on assets left to a spouse are at least postponed.  You would hope that the wills of these men were changed during 2010 to allow substantial transfers to heirs other than the spouse for 2010 alone. It will be interesting to see.

So is it fair that the heirs of one person benefit in such a disparate way over others simply by virtue of the date of the death? Should the tax be imposed retroactively? Some have made calls for congress to impose the tax on a retroactive basis. I believe this would be unconstitutional and cause so many lawsuits that congress will likely avoid it. I also believe that they will not act before the 2011 rates take effect.

Basically, if 2010 was a great year to die, 2011 will be a horrible year to die. By 2012 I expect a more balanced congress will impose a $3.5 million exemption with a 45% rate. This more sensible approach will protect family farms and small business from heavy debt burdens and or liquidation. By avoiding liquidation of small business you avoid additional job losses. Just makes more sense.

Posted by David Sheives

The House of Representatives on December 7, 2009 passed the so-called “Extender Bill,” This is 2010 version of the annual bill which will now extends about 50 expiring tax provisions to 2010.  These include the Sales Tax Deduction, Standard Deduction for Real Property Taxes, Deduction for Qualified Education Expenses,  School Teacher deductions, 15 Year Deprecation for Certain Property, R & D Credit, Tax Incentives for Biodiesel and Renewable Diesel, Certain Tax Relief for Disaster Losses, etc.  

Something new in this bill is a new provision to tax “carried interest” income as ordinary income (rates of up to 35%) as opposed to capital gains (currently 15%).  This is directed at the Private Equity/Hedge Fund operators, who in recent years have had garnered some really bad publicity because they were making billions of dollars and paying tax at the 15% capital gains tax rate (note the word “were”—I don’t know how many are making this kind of money now).

The legislation is so broad based, however, that it will also cause a decrease in capital formation for real estate projects at a time when the real estate industry really needs the investment.  A lot of  real estate projects include some type of carried interest for the developer—if the law passes, the after tax return, and therefore his or her tolerance for risk, will decrease.  And in this economic climate, we are seeing some lenders taking carried interests in order to finance or continue to finance projects—and with his new law, lenders will not be motivated.

Many other industries use the concept of carried interests, but one in particular is oil and gas exploration.  Once again, this law will reduce investment in oil and gas.

Most of the provisions of the Extender Bill will be welcomed.  The carried interest provision, however, is likely to reduce investment in a lot of industries, at a time when that investment is really needed.  Hopefully the Senate will not pass the law with that provision in it.

Posted by David P. Donnelly, CPA

Following basic principles can reduce risk for small businesses. Risk management is a fundamental element of any business, regardless of its size. Small companies are fundamentally no different from big companies when considering basic principles that add value and preserve business.

By adhering to certain “big company” risk-mitigation strategies, independently owned or small companies can take crucial steps toward shoring up their positions in the business landscape. Keep the following list in mind when considering ways to help your firm manage risk:

Click here to read the rest of this article by G. Scott Soles, CPA.

Business owners and fellow entrepreneurs have lately been asking; where are businesses getting financing these days? The answer is less and less at traditional banks. The mid market firms we deal with are caught in the crunch. Too big for family and friends financing, too small for Wall Street or junk bond issuances and spurned by the banks that served them in the past.

The answer to the question is varied depending on the health of the business, where it is located and the industry it is in. Here are some of the answers:

Many companies are operating under forbearance agreements with their banks. Unable to deleverage as fast as their loan agreements expire they simply operate under the old loan agreements in default and pray. The healthy companies are finding some relief from private equity groups offering new issue non investment grade notes and partial equity buyouts. It is estimated between now and 2010 over $600 billion in revolving credit lines will mature. Look for even more creative non bank financing as billions sit on the sidelines looking for a place to park and desperate companies seek replacements for their traditional banks.

Posted by David Sheives

http://money.cnn.com/2008/11/06/news/companies/automakers/index.htm?postversion=2008110622

These companies are obviously on their way out. Please don’t send my tax dollars to fund companies that should be taken over within the next year anyway.

If the money does in fact go to these companies, it is immediately being turned over to union worker’s pensions. I have no desire to pay for someone else’s retirement, nor should I be responsible for it. Stop the handouts and let these companies be purchased in a free market.

Submitted by Chris Bailey

As I was watching CNN on the kitchen TV, I saw the Federal Reserve reduced interest rates to 1%. That is simply ridiculous. Interest rates at 1% bear no market resemblance.

Ron Paul mentioned the Fed’s actions are immoral and I agree. There are a lot of retirees that could and should be earning a lot more than 1% on their money. Interest income being paid at 1% doesn’t allow the retirees to keep pace with inflation.

When the internet bubble popped, the Federal Reserve dropped interest rates to 1%. What did it create? Another bubble in real estate and malinvestment. Below Ron Paul explains the effect of easy money on the economy.

“Longer-term and more capital-intensive projects, projects that would be unprofitable at a high interest rate, suddenly become profitable.

Because the boom comes about from an increase in the supply of money and not from demand from consumers, the result is malinvestment, a misallocation of resources into sectors in which there is insufficient demand.

In this case, this manifested itself in overbuilding in real estate. When builders realize they have overbuilt and have too many houses to sell, too many apartments to rent, or too much commercial real estate to lease, they seek to recoup as much of their money as possible, even if it means lowering prices drastically.” —

When prices need to come down, we need to allow this to happen. Instead, the government keeps trying to prop up these unreasonable prices. It’s simple supply and demand. If the supply for housing exceeds the demand for housing, the price must drop.

The market needs to determine interest rates. That should start with the abolishment of the Federal Reserve.

Submitted by Tom Waller

Market Volatility:

I have written about this before, but the market has taken this to a new extreme. There is really no excuse to have swings of 1,000 points in intraday trading. It is apparent that many people are either profit taking every time there is an upswing or removing large sums of money from the market as a whole. I find it troubling that people have so little faith in the markets now that the only investors who remain long are those with substantial losses. Hopefully we can settle into a pattern of either sustained loss that will allow the market to find a bottom. That is the only way that I see the market stabilizing in the near future. My favorite quotation, “Buy when there’s blood in the streets, even if the blood is your own.”

The dollar will be worthless in the near future, at least that is what it seems like our government is trying to accomplish. The mere mention of another stimulus package is absolutely insane. Did we not just stimulate our banking industry with 700 billion dollars? Does the Fed really find it necessary to mention that they foresee more rate cuts? We are flooding the global economy with American Dollars. If a company you owned were to start passing out shares of stock you would be outraged. Why is there not similar anger over the outright dilution of our currency? We are losing traction against almost every other currency in the world that is not directly linked to our own.

To quote Ivan Boesky, “I think greed is healthy”.

Submitted by Chris Bailey

Today should be an interesting one on Wall Street. I am anxious to know how the market will react to the recent Fed rate cut. Normally we see a rate cut stimulating the economy as demand for loans increases to spur economic activity. Except wait a minute, The banks aren’t making loans at any rate. This is a liquidity crisis. It doesn’t matter what the price of the loan is if the bank has no liquidity to make the loan. The rate cut may factor into a long term recovery but don’t expect to see a quick turnaround of the last weeks losses.

Submitted by David Sheives

Rate cut of half a point, 700 billion dollar bailout. Can we print any more money? Not only is my net worth eroding before my eyes as the market sends blood into the streets, but what cash I do have is becoming worthless as cash is being printed as fast as the mint can handle. This country needs drastic reforms to fix this. We are in the middle of watching our nation’s wealth be destroyed by poor decisions and a desire to prop up a failing market.

I am of the opinion that we all would have been better served letting risk taking institutions fail. Is that not what we are all taught? With great risk comes great reward. That is quickly becoming the case for any company that does so. However, the American people are being punished for the risks they took in supporting these entities. I have heard people referring to executives coming out on top. Do you not realize the majority of these executives’ net worth was tied to these companies in stock grants and options? They are watching as their nest egg is smashed just like the rest of us.

Submitted by Chris Bailey

700 billion dollars, that is a pretty disgusting amount of money. I am terribly afraid that government is going to authorize a free wheeling spending spree with freshly printed money.

The value of the dollar will fall through the floor and we will all be facing inflation to rival that of my parent’s generation. I will say, to those of us fortunate to live in the Houston area, that our real estate market has been forged by those who suffered during the previously boom-bust cycle. We are living in relative comfort, for now.

I am concerned about our global standing as an economic power now that our government has shown a willingness to devalue our currency to toilet paper levels.

I understand the ramifications of not bailing these companies and I, personally, would bear my share. The government is setting a dangerous precedent of using taxpayer dollars to bail out private companies, and that is an idea I want no part of.

Let them fail, take the punishment, and, for those who can, start building a new foundation of dollars in the market. Your money will have infinitely more value if the government can refrain from writing themselves a blank check.

“A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits the public treasury with the result that a democracy always collapses over lousy fiscal policy, always followed by a dictatorship. The average of the world’s great civilizations before they decline has been 200 years. These nations have progressed in this sequence: From bondage to spiritual faith; from faith to great courage; from courage to liberty; from liberty to abundance; from abundance to selfishness; from selfishness to Complacency; from complacency to apathy; from apathy to dependency; from dependency back again to bondage.”

Alexander Fraser Tyler, Cycle Of Democracy (1770)

Submitted by Chris Bailey