Matt’s next class. . .

Posted on | July 16, 2009 | 2 Comments

August 28, 9:30 am:      Legal Landmines: Grow Your Business Without Stepping In It

Congressman Burton to Co-sponsor the Homebuyer Tax Credit Act

Posted on | March 17, 2009 | No Comments

The current recession started with a crisis in the real estate market, and the solution, in large measure, remains tied to the real estate market.  However, there are three problems with the massive stimulus plan Congress passed, as it relates to housing.

First, the current stimulus plan limits the $8,000 tax credit to first time home buyers.  Those buyers are in the lower end of the housing market.  So, there is no direct stimulus for middle to upper-end home buyers, who tend to buy larger and more expensive homes.  It made no sense for Congress to stimulate demand for the lower end of the housing market and essentially ignore the other portions of the housing market.

By offering a tax credit to all home buyers, not just first time buyers, Congress would provide needed stimulus for the entire residential real estate industry.

Secondly, Congress failed to account for the fact that all real estate markets are not alike.  Some areas of the country are suffering more than others.  Southern California, Florida, Arizona and Nevada have horrible real estate troubles.  California has seen a drop of nearly 75% in home values in particular areas of that state.  Supply in those markets is out-pacing demand.  There are too many homes, and too few buyers.

In Indiana, we have not suffered huge drops in values, because values here were never over-inflated.  The fall in Indiana property values has not been so deep, because the rise in values was not as high over the past few years.

We need a program that accounts for the differences in local real estate markets across the country.  Congress should establish a formula for determining what constitutes “excess” housing supply for a particular market.  For example, Congress could determine that a normal amount of housing inventory is five months of home sales, on national average.  Then, Congress could provide greater buyer incentives for those markets with excess inventory (greater than five months of inventory), until housing supplies have dropped to a “normal” level.  This would enable Congress to direct more aid to those markets in greatest need.

Thirdly, there is a difference between stimulating the sale of existing homes and stimulating demand for new home construction.  In Marion County, Indiana, we have too much housing inventory.  We need incentives for home buyers to purchase existing homes.  We do not need incentives for new home construction.  By contrast, housing inventories in the surrounding counties are much lower.  Arguably, Hamilton County, Indiana is seeing a housing shortage.  So, new home construction should and could be stimulated in those counties that do not have excess inventory.

What’s the first rule of selling real estate?   Location, location, location.  Congress has ignored that basic principle.   All real estate is not the same, nor are all real estate markets the same.

Are there any solutions in development?

Sort of.

Indiana Congressman Dan Burton is going to co-sponsor the Homebuyer Tax Credit Act, H.R. 1245.  The goal of the bill is to stimulate the entire housing market by offering a $15,000 tax credit to individuals who purchase a home in the next year.  The amount of the tax credit would be $15,000 or 10 percent of the purchase price, whichever is less. Purchases must be made within one year of the legislation’s enactment, and the tax credit would not have to be repaid.  The bill, if passed into law, would replace the current $8,000 housing tax credit.

H.R. 1245 would address some, but not all of the concerns I have expressed in this blog.

What are your thoughts on the subject?  Post your comments.

Some Relief for Small Business is Coming

Posted on | March 15, 2009 | 1 Comment

The White House will provide billions of dollars in federal lending aid for small business owners. 

Finally!

The effort will be announced Monday and reportedly will include $730 million from the stimulus plan that will go to reduce small-business lending fees and increase the government’s guarantee on some Small Business Administration (SBA) loans to 90 percent. The government will also try to boost bank liquidity with more than $10 billion for the secondary credit market.

President Obama and Treasury Secretary Timothy Geithner will announce the new efforts Monday.  The US Chamber of Commerce supports the new efforts.

With income taxes set to rise significantly on small business owners in 2011, small businesses need all the help they can get.  Small businesses in need of capital are hurting, even though it is the small business community that creates most of the jobs and stimulus in our economy.  Republicans have lobbied the White House hard in recent weeks to shift more of the stimulus plan money away from big projects and large institutions and toward small businesses.

The amount of SBA guaranteed loans has dropped in the past year from $20 billion to just $10 billion.  That is clear evidence that credit available for small business development is much harder to find today.

When details of the plan are announced Monday, I’ll add another blog post to comment and explain.

What is “Phantom Income” for a small business owner?

Posted on | March 6, 2009 | 8 Comments

Before I can define “phantom income,” I’ve first got to explain how “tax flow through entities” work.  Basically, if you own at least part of a partnership, limited liability company or S-corporation, you get a a tax bill each year based on your share of the business’ profits.  That bill comes in the form of a K-1 tax form, which shows your portion of the profits or losses.

So, if you own 40% of a company (for the entire tax year) that had $100,000 of profits in 2008, then you would get a K-1 for $40,000.  If you only owned that 40% for half the year, your K-1 should report $20,000 of imputed income to you.  You then have to report that income on your individual income tax return and pay taxes on that amount.

But wait!  What if the company never paid you a distribution (a/k/a dividend) equal to your K-1 number?  Or, what if the company only pays you $12,000, but your K-1 shows $40,000 of income?  If that happens, you have have “phantom income.”  So, even though you only received a distribution of $12,000, you have to pay income taxes on the full $40,000.

If you want to avoid paying taxes on “phantom income,” then you should consider an agreement among all the owners and the company requiring the company to distribute at least enough profits to cover the taxes on your “phantom income.  When I draft these agreements for my clients, I like to include a provision requiring no less than 40% of the company’s profits to be distributed, which should normally be enough in distributions to cover the highest marginal tax rate on any one owner.  I include an exception, in the event the company has anticipated cash flow issues, or is about to make a large expenditure and needs the cash.

If you fail to include such a provision in your agreements, then you run the risk that the majority owners might try to “freeze out” the minority owners by causing “phantom income” to be reported on the minority owner’s K-1, year after year after year.  In that case, it actually costs money for the minority owners to own a share of a profitable company.

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Far Too Little Stimulus for Small Business

Posted on | February 19, 2009 | No Comments

I don’t like to “copy and paste” content from other business thinkers into my blog.  I do borrow, meld, mix and reshape ideas I learn from other people, but try to add some original thought in everything I write and say.

Here’s a rare exception.

If you care about small business or our economy, you have to read this blog post by Dennis Romero on Entrepreneur.com-

Entrepreneurs Not Feeling Stimulated