Category Archives: Business Planning

How insiders can legally profit from insider information

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 Insight on how company insiders can still profit from insider information

Despite efforts by the Senate and president to reduce profiting from inside information there remain loopholds for corporate insiders that may be useful to those who are observant. Corporate insiders whose companies are about to be bought by rivals are forbidden from buying shares ahead of time to profit from the price jumps that takeover announcements often bring. But they accumulate plenty of shares just the same.
That’s because company managers are often paid partly in stock. Many sell these shares at regular intervals, whether to use the cash for other purposes or to keep their personal assets from becoming too concentrated in a single stock.
For this reason, managers who decline to buy their companies’ shares ahead of takeovers may nonetheless accumulate them if they also halt their typical selling.

Anup Agrawal of the University of Alabama and Tareque Nasser of Kansas State University studied 3,700 takeovers announced between 1988 and 2006. They compared trading in the year before takeover announcements (the “informed period”) with the year before that (the “control period”).  They found that insiders tended to reduce their buying during the informed period, but they reduced their selling even more. The result was an increase in net buying. Over the six months prior to deal announcements, the dollar amount of net purchases for officers and directors at target firms rose 50% relative to ordinary net purchase levels.

This “passive insider trading,” as the authors call it, is legal. But it is profitable? Agrawal and Nasser didn’t look at returns, but a study published a year ago in the Journal of Multinational Financial Management offers clues. Researchers from Australia’s Commonwealth Bank and Deakin University looked at U.S. takeovers between 2001 and 2006. They found that shares of target firms tended to outperform by nearly seven percentage points during the 50 trading days preceding deal announcements.

Nothing illegal in these situation just good old fashion financial planning can yield a net gain if properly structured.

*Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

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*Inspired by “An Insider Trading Loophole Congress Didn’t Close” by Jack Hough | SmartMoney | March 23, 2012

2012 -0213 Obama’s budget today

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Obama’s budget announcement today – not a surprise

Proposed 2013 budget would reduce dividend tax break, impose new rules, and raise top marginal rate to almost 40%

The $3.8 trillion budget that President Barack Obama proposed today for 2013 would generate $1.4 trillion in new taxes for the wealthy.

Perhaps the only surprising element of the proposal puts dividends paid by high-income Americans at ordinary income, boosting the rate paid to 39.6% from a current rate of 15%.

The higher rates would apply to couples making $250,000 or more and individuals making $200,000 or more IF they earn significant income from dividends.

Originally, the president had supported continuing to tax dividends at a favorable rate, but administration officials said Mr. Obama decided the nation couldn’t afford it.

“We don’t need to be providing additional tax cuts for folks who are doing really, really, really well,” Obama said today in a speech at Northern Virginia Community College.

This is not news, in 2003, dividends were taxed as ordinary income.

Not surprisingly, Republicans in Congress immediately criticized the president’s budget and predicted failure for the tax increases wanted by the White House. .

The change in dividend taxation would raise $206.4 billion over a decade, according to the administration, which has said the wealthy need to pay more to help the nation control its deficit and spur economic growth.

The president’s proposal would end the Bush era tax cuts and limit tax deductions to 28% for wealthy Americans, again defined as those couples earning $250,000 and individuals making at least $200,000.  Limits them to 28% but does not eliminate them. These high-income earners already were set to take a hit in next year when a provision of the 2010 health care law kicks in that will tax their unearned income at 3.8%.

The administration’s proposed budget also would boost the top capital gains tax rate to 20% from today’s top rate of 15% and the income tax rate would max out at 39.6% in 2013 (increased from 35%). As expected, the plan also would tax private-equity managers’ profits-based compensation at ordinary income rates (which it is) instead of the 15% current capital gains rate.

The president’s budget also sets a new rule called the “Buffett rule,” that would set a 30% minimum tax for individuals with $1 million or more of annual income, a proposal that’s been discussed since last year after billionaire Warren E. Buffett said the wealthy weren’t paying enough in taxes. That tax would replace the alternative minimum tax (AMT), which the White House contends hits the middle class instead of its goal of keeping the richest Americans from paying too little.  It is great if it replaces AMT.

Republicans do control the House and wield significant influence in the Senate so it’s unlikely that Obama’s budget will make it out of Congress but only time will tell.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Self Employed Individual 401K Plan Loans

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Who said you can’t have your cake and eat it too?

Self employed small business owners have an opportunity to not only save maximally through retirement plans but also build a safety-net through their ability to borrow from their individual 401K accounts.  Properly structured they can borrow from their retirement plan when the need arises without incurring the usual 10% penalty for early withdrawal.

In addition, 401k Loans for the Self employed business owners provides a loan, while allowing them to pay back interest to their own 401K rather than a financial institution.

An Individual 401k loan is permitted using the accumulated balance of the Individual 401k as collateral for the loan. Individual 401k loans are permitted up to 1/2 of the total balance of the 401k (but not exceed $50,000). A loan from an Individual 401k is received tax free and penalty free. There are no penalties or taxes if loan payments are paid on time.

Individual 401K Loans

  1. Can be used for any purpose.
  2. There are no income or credit qualifications to receive the loan.
  3. The monthly loan payments of principal and interest are repaid back into your own Individual 401k – you borrow and grow your retirement at the same time.

In addition, the assets can be from prior employer or IRA accounts that are rolled over to your individual 401K account.

Individual 401k are available to self employed individuals and small business owners with no full time employees other than a spouse. Your business can be a Sole proprietorships, LLC, S and C corporations,

The terms are set by the employer (yourself) but the 401k usually has a 5 year maximum repayment term for most loans, except it can be longer, for home purchase. There are no income or credit qualifications although you must charge yourself a competitive interest rate.

Although simple and fast to execute you  should remember that you are borrowing on your retirement nest egg.  It is only a valid action when you know you will have the ability to pay it back – default results in a withdrawal that can carry a 10% penalty.  The loan facilitates borrowing when it might be too difficult or too expensive to go through banks and lending institutions.

As good as it sounds consider that unlike a mortgage or a home-equity loan, if you use a 401(k) loan to buy or improve your home, you won’t get a tax deduction on the interest you pay. You may have to pay a one-time fee to the plan administrator for the cost of originating a loan; the fee is usually $50-100. Your retirement plan will also miss future targets if you don’t continue making annual contributions while you have this outstanding loan.  Though most self-employed who borrow from their 401K often pay their loans early it is important not to misuse your hard-earned retirement assets.

As can be seen the 401K Loan, like all tools, has advantages in disadvantages.  The advantages for the self employed should  encourage anyone who is or is planning to have their own business to begin saving in a tax deferred manner maximally.  By using an individual 401K account you can have your tax deferred savings and simultaneously build a safety net.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

IRS reports: Payroll Tax Extended into 2012

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Payroll Tax Cut Temporarily Extended into 2012
– reprinted from IRS Newswire IR-2011-124

The Temporary Payroll Tax Cut Continuation Act of 2011 temporarily extends the two percentage point payroll tax cut for employees, continuing the reduction of their Social Security tax withholding rate from 6.2 percent to 4.2 percent of wages paid through Feb. 29, 2012. This reduced Social Security withholding will have no effect on employees’ future Social Security benefits.

Employers should implement the new payroll tax rate as soon as possible in 2012 but not later than Jan. 31, 2012. For any Social Security tax over-withheld during January, employers should make an offsetting adjustment in workers’ pay as soon as possible but not later than March 31, 2012.

Employers and payroll companies will handle the withholding changes, so workers should not need to take any additional action.

Under the terms negotiated by Congress, the law also includes a new “recapture” provision, which applies only to those employees who receive more than $18,350 in wages during the two-month period (the Social Security wage base for 2012 is $110,100, and $18,350 represents two months of the full-year amount). This provision imposes an additional income tax on these higher-income employees in an amount equal to 2 percent of the amount of wages they receive during the two-month period in excess of $18,350 (and not greater than $110,100).

This additional recapture tax is an add-on to income tax liability that the employee would otherwise pay for 2012 and is not subject to reduction by credits or deductions. The recapture tax would be payable in 2013 when the employee files his or her income tax return for the 2012 tax year. With the possibility of a full-year extension of the payroll tax cut being discussed for 2012, the IRS will closely monitor the situation in case future legislation changes the recapture provision.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

IRS: Banking transactions reported early 2012

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Banking Expenses are Going Up
Expect our fees to follow

The Internal Revenue Service just released this FAQ – that they are providing special transitional relief to banks and other payment settlement entities required to begin reporting payment card and third-party network transactions to the IRS on new Form 1099-K.  These are the fees that banks are trying to find a way to pass on to us, the consumer.

By law, reporting is scheduled to begin in early 2012 for payment card and third-party network transactions that occurred in 2011.

See details at:
http://www.irs.gov/newsroom/article/0,,id=249029,00.html

What is a third-party settlement organization?
A third-party settlement organization is a central organization that has the contractual obligation to make payments to participating payees (generally, a merchant) in a third party payment network. Characteristics of a third party payment network include: (i) the existence of a central organization with whom providers of goods and services have established accounts, (ii) an agreement between the central organization and providers to settle transactions between the providers of goods and services and purchasers, (iii) the establishment of standards and mechanisms for settling such transactions and (iv) the guarantee of payment in settlement of such transactions. The most common example of a third-party settlement organization is an online auction-payment facilitator, which operates merely as an intermediary between buyer and seller by transferring funds between accounts in settlement of an auction/purchase. Third-party settlement organizations charge sellers a fee for facilitating the transaction. Under the reporting requirements, these entities must report the gross reportable transactions of the businesses to which they make payments provided the payee satisfies certain transaction volume and dollar thresholds.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Government Policy To Watch

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Financial Policy in the news
Government policy that will impact our bottom line

1. Senate replaces Obama tax increases with millionaires’ tax

When President Barack Obama announced his jobs package in early September, he proposed paying for the measure with a series of tax increases on individuals making more than $200,000 and families making more than $250,000. Among them was a 28% cap on the tax exemption for municipal bond purchases and a hike in the tax on “carried interest” for private fund managers from the capital gains rate to the individual rate. In their version of the jobs plan, Senate Democrats replaced the Obama tax increases with a 5.6% surcharge on millionaires. The tax would apply to adjusted gross income less investment interest deduction above $1 million. Senate Democrats believe that the $1 million threshold more clearly delineates the difference between the middle class and the wealthy.

2. Obama’s jobs plan sliced, diced, stalled in Congress

In rallies around the country earlier this fall, Mr. Obama touted his jobs package and urged Congress to “pass this bill now.” By October, he was hoping that Congress would approve at least parts of it. It’s been slow going. The Senate blocked the entire $447 billion measure from getting to the floor. It was then diced up into smaller parts, and some blocked later on. The first portion of the package to get any traction was a provision to repeal a tax on government contractors that is set to go into effect in 2013. The bill’s prospects in the Senate are unclear.

3. Bills to promote crowd funding, raise SEC registration thresholds pass House Financial Services Committee

A bill that is similar to another piece of Mr. Obama’s jobs package was approved by the House Financial Services Committee on Oct. 26, would allow so-called crowd funding to finance startup companies by allowing the firms to pool small investments up to $5 million without having to register with the Securities and Exchange Commission. State regulators object, arguing that the bill would foster fraud.

4. What is the Buffett Rule? Capitol Hill steps into the definition vacuum

As he ramped up his re-election effort this fall, Mr. Obama proposed a so-called Buffett Rule. Named after Warren Buffett, the idea is that middle-class taxpayers should never fork over a higher percentage of their earnings to the federal government than the wealthy. The notion is based on Mr. Buffett’s suggestion that it is wrong for him to pay taxes at a lower rate than his secretary. A new bill, imposes an additional 5% tax on income from $350,000 to $500,000, 10% on $500,000 to $1 million, 15% from $1 million to $10 million and 20% on income exceeding $10 million. Another group has put forth a far different concept – taxpayers would be allowed to donate money to the Treasury Department to help pay down the national debt.  This last ‘concept’ has always been available BUT has yet to generate any income.

5. Republicans try to set rates on capital gains and dividends at 15% permanently and remove health care tax

House and Senate Republicans are attempting to bring some certainty to tax policy through a measure that would set capital gains and dividends rate permanently at 15%. If Congress does not extend the Bush tax cuts, the capital gains rate will rise to 20% and dividends will be taxed at individual rates beginning in 2013. In addition, the GOP is trying to get rid of a 3.8% Medicare tax that will be assessed on investment income starting in 2013 to help pay for the health care reform law.  Not sure how they plan to pay for it in a balanced budget BUT it may be a way to stop Obamacare by stopping its funding.

6. Legislation could allow retirement account borrowing to pay mortgages

Retirement savings advocates are wary of a bill that would allow penalty-free withdrawals from tax-exempt pension and retirement plans in order to pay mortgages.  It already allows it in 401K plans.  I would prefer that they borrow than withdraw BUT not for mortgage payments without a financial plan that helps them get ‘real’ to their current financial situation.

7. DOL on fiduciary-duty rule

The Labor Department is making clear to the financial industry that it is not abandoning a regulation that would significantly expand the definition of “fiduciary” for investment advisers to retirement plans. The agency withdrew a proposed rule in September which would increase regulatory and liability costs, and would drive brokers out of the individual retirement account market because it would subject them to fiduciary duty for the first time. But why would we want brokers who don’t follow fiduciary duty to be in the individual retirement market?

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Taxes prior to Debt Super Committee Vote

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2012-13 Tax Planning
– Prior to Debt Super Committee meeting deadline (Nov 23rd)

There are at least 60 income tax provisions scheduled to expire at the end of 2011 but even if they do the most significant income tax changes are expected in 2013.

The Bush tax cuts are set to expire and income tax rates rise in 2013. At that time, itemized deductions would once again be partially phased out, the estate tax exemption will drop precipitously and the estate tax rate will jump unless they are re-enacted.  At the same time we’ll begin the new healthcare surtax in 2013 that will result in 3.8% tax increase on
certain types of investment income and a tax of almost 1% on wages above a specified threshold.
Between now and 2013, we expect much talk about changes but the Congressional bipartisan ‘supercommittee’ is considering controversial revenue-raising measures, such as limiting itemized deductions for high income tax payers and other altered tax treatments. The vote & recommendations on November 23rd will play a large part in our confidence that our economy will begin to grow soon before the tax increases in 2013.

Our long term success still remain with business growth and ability to create and support well paying jobs.

What does this mean for investors? That we plan for what we know, not what might happen.  But we keep our eye on what changes are approved so that we can adjust and still reach your personal and professional goals.

This year and next year (are consistent with 2010) present us with tactical and strategic decisions that may require action before those rules expire.

Here are two lapsing provisions:
AMT Patch was extended from 2010 to 2011. If Congress
does not extend it, the AMT exemption for 2012 would
return to earlier, lower levels and will result in more tax owed.

The portion of the Federal Insurance Contributions Act (FICA) tax that goes to Social Security was reduced temporarily in
2011 from 6.2% to 4.2%. With no extension, the higher rate
returns in 2012.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com