All posts by : Andy Lewis

Potential New Tax on Stock Buybacks and What it Could Mean for the Financial Markets

President Biden’s latest spending bill could result in a new tax on corporate stock buybacks. In its most recent incarnation, the Senate version of the plan includes a two percent excise tax on stock buybacks. Still, this isn’t enough for many critics of stock buybacks, who claim they incentivize short-term behavior in lieu of long-term investment.

Short-Term Incentives

Stock buyback programs have long been criticized for giving a short-term boost to share prices with funds that could have been used for long-term investment instead. Critics, including the current president, believe stock buybacks come at the expense of capital investment in new or updated factories, research, worker training, etc. These critics believe this type of long-term investment is the key to sustainable growth.

Changing Behavior with Taxes

Some critics advocate for an outright ban on stock buybacks, but they are in the minority. Instead, the recent Senate bill proposes a two percent tax on stock buybacks. This tax has a dual purpose. First, it aims to discourage buybacks and encourage longer-term investment. Second, it's a revenue generator to help fund the trillions in new spending in the bill.

Will the Two Percent Tax be Enough to Matter?

While a two percent excise tax on buybacks may not be draconian, it appears to be significant enough to drive a change in behavior. In a CNBC poll, more than half of CFOs indicated the two percent tax is enough for them to curtail their buyback program. Only 40 percent said they would not change their buyback program plans (CNBC Global CFO Council Survey).

Impact on the Capital Markets 

Stock buybacks have had a significant impact on the markets. Not only are companies using excess cash to buy back shares, but with interest rates so low for so long, many companies have even taken on debt to buy back shares. Still, excess cash that can't just sit on the corporate balance sheet is the main driver of the largest buyback programs. Established, cash-flush tech companies such as Apple, Alphabet, and Microsoft are the dominant players, accounting for nearly one-third of all buyback activity in the first half of 2021.

Given the recent run-up in the markets, buyback programs have not kept up. Couple this with the proposed increases in corporate tax rates from 21 percent to 25 percent, and there’s even less cash to fund buyback programs. Generally, most experts believe these macro-economic factors combined with the new two percent tax will cause a shift toward dividend payouts as they will be more favorable to shareholders.

Conclusion

The main idea behind the proposed two percent excise tax on stock buybacks is to both raise revenue and encourage corporate investment. Critics of stock buyback programs believe this is better for the economy and workers, whereas buybacks favor corporate shareholders at their expense. While a two percent tax might not be enough to create wholesale change, when combined with corporate tax rate changes, it appears to have enough teeth to change most public company CFOs.

How to Develop Company Travel Policies Post-COVID

According to a recent U.S. Travel Association forecast, only about one-third of companies are requiring their employees to travel. With business travel still at a low, how can companies develop a travel policy that reduces the risk of COVID-19?

Occupational Safety and Health Administration

When it comes to business travelers, whether employees are traveling domestically or internationally, OSHA recommends employers consult the Centers for Disease Control and Prevention (CDC) for guidance.

Travel Guidance

The CDC advises against traveling internationally for those who are not vaccinated, have been exposed to the virus, are sick with it, test positive for it, and/or are waiting for results from COVID-19 exposure. Even for travelers who are fully vaccinated, the CDC reminds us that becoming infected and/or spreading the virus is still possible.

Travelers should follow all guidelines at their point of departure, on the airline, and at their destination (e.g., wear face masks, get tested to show proof of being COVID-19 negative, maintain social distancing) to be compliant with requirements during each point of the journey.

For those returning to the United States, fully vaccinated travelers must have a negative COVID-19 test taken within 72 hours of travel. Fully vaccinated individuals are suggested to test three to five days post-travel, keep an eye out for symptoms, and test and isolate if there are symptoms. Travelers who are not fully vaccinated must have a negative COVID-19 test within 24 hours of travel. Travelers who are not fully vaccinated are advised to test three to five days after, along with self-quarantining for seven days, post-return. Even if the COVID-19 test is negative, self-quarantining for seven days after travel is advised. If the COVID-19 test is positive, travelers should quarantine. If unvaccinated travelers don't get tested, they should stay at home and self-quarantine for 10 days post-travel. If symptomatic, test and isolate.

When it comes to domestic travel, differences exist between fully vaccinated and partially/non-vaccinated travelers. Along with masking and government mandates for fully vaccinated travelers, upon return, they need to keep an eye out for symptoms and isolate if any develop. However, there are no recommendations for testing or self-quarantining for fully vaccinated or those who have recovered from an infection within the past three months.

For unvaccinated domestic travelers, along with adhering to masking, social distancing, hand hygiene practices, and government mandates, testing 24 to 72 hours before departure is recommended. Upon return, travelers are advised to get tested three to five days later and quarantine for one week. If non-vaccinated travelers don't test, a 10-day quarantine is recommended. If a test is done and it's negative, a one-week isolation period is recommended.

Assessing Financial/Legal Risk

Employers must determine if the work that requires travel is truly essential, and if it is in all jurisdictions, it should be documented. There are a few types of potential financial and/or legal liabilities if employees travel to perform their work duties. If an employee becomes infected, a workers' compensation claim could be opened. If an employee does not receive accommodation, either not having to travel or being unable to work safely in the office with a worker who may have been exposed to COVID-19, legal issues may develop. Additionally, a whistleblower lawsuit may exist if an employee alleges the company has violated public health requirements. However, if business travel can't be delayed, there must be guidelines to reduce the risk of travel becoming a way to catch COVID.

Protect Employees Before Travel Begins

Businesses are advised to give their employees adequate personal protective equipment (PPE). Depending on how and where the employee is traveling, he or she is required by federal law to wear a mask in and on mass transit (e.g., airplanes, trains). It also may help to provide gloves, hand sanitizer, and wipes.

Study Transit and Destination COVID-19 Policies

Whether it’s domestic or international travel, different cities, states, and countries have different requirements for those who are vaccinated and those who are not. Depending on where the traveler has a layover, there could be testing, proof of vaccination, or masking/social distancing requirements in place at various spots.

Agree to Travel-Related Activities

By highlighting the risks of visiting certain venues that may pose higher risks (e.g., restaurants, gyms), an employer also can mandate employees to wear masks, socially distance, wash hands frequently, etc., regardless of the locale’s requirements.

Plan Ahead for Post-Travel Office Work

Another important component of a travel policy is how the business and its employee(s) will return safely to work and interact with co-workers and clients. For the most extreme cases, there could be a 14-day work-from-home policy to reduce the risk. Businesses can mandate testing for employees as long as they cover testing costs and testing requirements are applied fairly companywide.

While the world is reopening to commerce, especially instances when business deals necessitate face-to-face meetings with people from different cities and continents, safety with COVID-19 is paramount.

Sources

https://www.ustravel.org/press/new-forecast-signals-long-road-recovery-business-travel

https://www.osha.gov/coronavirus/control-prevention/business-travelers

https://www.cdc.gov/coronavirus/2019-ncov/travelers/travel-during-covid19.html 

https://www.cdc.gov/coronavirus/2019-ncov/travelers/international-travel-during-covid19.html

Inflation Adjustments for 2022 Returns

This article explains the new inflation adjustments that are being made by the IRS issued through Rev. Proc. 2021-45. The IRS also cautioned that “with legislation pending in Congress that might affect 2022 tax returns, taxpayers should consult future IRS guidance to determine if the adjusted amounts in Rev. Proc. 2021-45 remain applicable in 2022.” Single individuals that make $10,275 and under are subject to a 10% tax, an increase of $325 from 2021. Other changed amounts for 2022 include unearned income of minor children, alternative minimum tax exemption amounts, interest on education loans, foreign earned income exclusion, and annual exclusion for gifts. To find out more in-depth information on the changes the IRS imposed, click the link.

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Preparing for Passage: An Overview of the Build Back Better Act

The Build Back Better Act (BBBA), a reconciliation bill comprised of $1.75 trillion in domestic spending, is currently working its way through Congress. Though no aspects of the bill are written in stone until the legislation passes Congress and is enacted by the President, it is important to remain aware of the items that are potentially in store.

The BBBA Framework

Billed as “President Biden’s plan to rebuild the middle class,” the legislation covers a wide range of areas. Originally, the BBBA was slated to cost $3.5 trillion, but that number was trimmed down to $1.75 trillion over the course of negotiations. According to a framework published by the White House, the BBBA would ideally include the following:

• Investments in Children and Caregiving ‚Äì Universal and free preschool; tax provisions designed to make parenting and childcare more affordable; improvements to Medicaid coverage for seniors and those with disabilities; and an extension of the Child Tax Credit expansion established by the American Rescue Plan Act (ARPA)
• New Efforts to Combat Climate Change ‚Äì New consumer rebates and tax credits to incentivize families to switch to clean energy; corporate incentives for domestic production of clean energy technology; a new Clean Energy and Sustainability Accelerator to promote environmental justice; and historic investment in coastal restoration, forest management, and soil conservation
• Expansion of Affordable Health Care ‚Äì A reduction of prescription drug costs; new investment in the Affordable Care Act aimed at reducing insurance premiums; closure of the Medicaid coverage gap; and an expansion of Medicaid to cover hearing benefits
• Economic Measures Aimed at Bolstering the Middle Class ‚Äì Investment in affordable housing; extension of the expanded Earned Income Tax Credit (EITC); expansion of access to post-high school education; expansion of the free school meals program; a Rural Partnership Program to funnel funding into underserved rural areas; and investments in immigration reform
• New Tax Provisions to Cover the Costs of BBBA Initiatives ‚Äì A 15% minimum tax on corporate profits for corporations with more than $1 billion in profits; a 1% surcharge on corporate stock buybacks; a 15% minimum tax on foreign profits of U.S. corporations; a new surtax on the top 0.02% of Americans‚Äî5% on income greater than $10 million and an additional 3% on income above $25 million; investment in the IRS, including hiring enforcement agents to investigate wealthy taxpayers for evasion, updating old technology, and increasing funding to taxpayer services

The Current State of Key BBBA Provisions

As mentioned above, there have been many changes to BBBA provisions throughout the course of congressional negotiations over the legislation. For the rest of this post, we want to concentrate on the areas that we see as particularly critical for our clients.

Firstly, below are some provisions that were originally included but that have since been negotiated out of the BBBA. The following items are no longer included in the BBBA:

• Changes to the taxation of the promote/carried interest
• Limitations on section 1031 like-kind exchanges
• Restrictions on the section 199A 20% pass-through deduction
• Repeal of the stepped-up basis of assets at death
• Changes to grantor trusts
• Increase to tax rates on income or capital gains

More importantly, here is a look at key items that are still currently included in the BBBA: 

• A 3.8% Net Investment Income Tax (NIIT) ‚Äì The NIIT would be expanded to apply to all income derived from a trade or business, including rent. It would apply to taxpayers with taxable incomes over $400k (single) or $500k (joint filers) and to trusts and estates with taxable incomes over $200k.
• A Surcharge on High-income Individuals ‚Äì A 5% surtax applied on individual taxpayers with modified Adjusted Gross Income (AGI) over $10 million. An additional 3% surtax would be applied on modified AGI over $25 million. For the purposes of the surcharge, ‚Äúmodified AGI‚Äù refers to gross income reduced by any deduction for investment interest. This provision would be applicable for taxable years beginning after December 31, 2021.
• A Provision Making Active Pass-through Loss Limitation Permanent ‚Äì Currently, losses from a business exceeding $250k (single filers) or $500k (joint filers) cannot offset portfolio income or W-2 wages in the year incurred and are effectively suspended for one year. The BBBA would permanently disallow excess losses from being applied to portfolio or wage income. This provision is applicable for taxable years beginning after December 31, 2021.
• Modifications to Treatment of Certain Losses¬†‚Ä쬆This change would require a loss in a worthless partnership interest to be treated as a capital loss and deferred until the property is sold to a third party.
• State & Local Tax Deduction¬†‚Ä쬆The SALT deduction cap would be increased from $10,000 to $72,500 and extended through 2031.
• Deduction for Energy-Efficient Commercial Buildings (section 179D)¬†‚Ä쬆The deduction would be extended through 2031. The requirement for greater energy efficiency would be lowered from 50% to 25%, among other changes.
• Public EV Charging Station Credit¬†‚Ä쬆The alternative fuel vehicle refueling property credit would be extended through 2031. The credit would also be increased beginning in January 2022.

Consequences of Some Retirement Options on Small Businesses

Valeria Alterman and Ariane Froidevaux delve into research on various retirement options for small business owners. They look into their custom model of retirement decision options for small business owners to separate from their business, all based on “the 'proximity' of the business to the individual once the decision has been made.” The four options (family succession, retirement from management while maintaining ownership, independent sale, and liquidation) are codependent with economic and natural consequences. Alterman and Froidevaux suggest that choosing the retirement option that is conducive to your situation has to be in tandem with your financial and psychosocial well-being. Also included in the article is a case study on Pierre, a co-owner of the Swiss bakery, and his journey to retiring as owner and manager. Click the link to learn more.

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Succession Planning Should Be Part of Family Business Strategy

Too often CEOs of a company will procrastinate the succession of their company to the next generation. This may happen since the idea of retiring from a business can be too difficult to embrace. Another reason is if the CEO decides to hand off the reigns to the family, there could be a dispute about who should take charge. To avoid problems with succession your best bet is to identify the next leader and start “defining goals and outcomes.” Checking in with the successor and transferor frequently is very important to make sure they remain aligned and keep the same goals in mind. To conclude, “The key is to take action well in advance, and get the house in order operationally to allow for coherent transitions in leadership that can be repeated for generations.” Be sure to check out the link for more information about succession planning.

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Keep Your Money in the Family with These Estate Planning Tips

This article explains why and how keeping money within the hands of the people you trust will help you in the future. Heirs could be responsible for “paying federal income taxes on either assets or retirement accounts, and if you plan poorly, your money could end up in the hands of an ex-spouse or creditor.” To prevent that tragedy, meeting with an estate attorney and an accountant could be very beneficial. To help keep your money where it belongs, think about drawing up a will, checking your beneficiaries, setting up a trust, converting traditional retirement accounts to Roth accounts, and gifting your money while you're alive. Setting up an estate plan can seem like tons of work, however, it is extremely important to look at it so that your family and friends receive the money you worked hard for. To learn more about the perk of estate planning, click the link.

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Keeping a Family Business Running Smoothly Generation after Generation

This article discusses three dysfunctions that are commonly seen throughout family businesses. Chris Yonker, the author of the article, says that following the steps of over-achievers can be a bad way to help ensure the family business continues to run properly. Often children are faced with the challenge of following the footsteps of their parents, even if they do not want to follow their steps. Parents that focus too much on their business instead of their children can “lead to detachment, guilt, and even substance abuse” for their child. Yonker also believes that taking away a child's opportunity to take personal responsibility for their actions can lead to problems in the future. Thirdly, Yonker states that children with a sense of entitlement are detrimental when expected to hold the company in their hands. To gain a sense of love and self-worth, “children need permission from their parents to be exactly who they are — not what anyone else expects them to be.” To learn more about how to properly hand down the family business, click the link.

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Receipt Signatures, Does Your Small Business Need Them?

This article discusses an important topic that all small business owners should consider as it occurs every single day. In the past, credit card transactions required a signature in order to help authenticate the purchase. However, with the development of EMV technology, most credit card companies have dropped this requirement, and large companies such as Walmart and Target applauded this decision. However, for small businesses, it is more important to ask some key questions in order to decide what is best for your business. The EMV process has proved efficient in detecting fraud, but that also requires your checkout system to have these technologies available. Be sure to check out this link for the full list of key questions and to help you decide what is best!

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