Employee vs. independent contractor: How should you handle worker classification?

Many employers prefer to classify workers as independent contractors to lower costs, even if it means having less control over a worker’s day-to-day activities. But the government is on the lookout for businesses that classify workers as independent contractors simply to reduce taxes or avoid their employee benefit obligations.

Why it matters

When your business classifies a worker as an employee, you generally must withhold federal income tax and the employee’s share of Social Security and Medicare taxes from his or her wages. Your business must then pay the employer’s share of these taxes, pay federal unemployment tax, file federal payroll tax returns and follow other burdensome IRS and U.S. Department of Labor rules.

You may also have to pay state and local unemployment and workers’ compensation taxes and comply with more rules. Dealing with all this can cost a bundle each year.

On the other hand, with independent contractor status, you don’t have to worry about employment tax issues. You also don’t have to provide fringe benefits like health insurance, retirement plans and paid vacations. If you pay $600 or more to an independent contractor during the year, you must file a Form 1099-MISC with the IRS and send a copy to the worker to report what you paid. That’s basically the extent of your bureaucratic responsibilities.

But if you incorrectly treat a worker as an independent contractor — and the IRS decides the worker is actually an employee — your business could be assessed unpaid payroll taxes plus interest and penalties. You also could be liable for employee benefits that should have been provided but weren’t, including penalties under federal laws.

Filing an IRS form

To find out if a worker is an employee or an independent contractor, you can file optional IRS Form SS-8, “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.” Then, the IRS will let you know how to classify a worker. However, be aware that the IRS has a history of classifying workers as employees rather than independent contractors.

Businesses should consult with us before filing Form SS-8 because it may alert the IRS that your business has worker classification issues — and inadvertently trigger an employment tax audit.

It can be better to simply treat independent contractors so the relationships comply with the tax rules. This generally includes not controlling how the workers perform their duties, ensuring that you’re not the workers’ only customer, providing annual Forms 1099 and, basically, not treating the workers like employees.

Workers can also ask for a determination

Workers who want an official determination of their status can also file Form SS-8. Disgruntled independent contractors may do so because they feel entitled to employee benefits and want to eliminate self-employment tax liabilities.

If a worker files Form SS-8, the IRS will send a letter to the business. It identifies the worker and includes a blank Form SS-8. The business is asked to complete and return the form to the IRS, which will render a classification decision.

Defending your position

If your business properly handles independent contractors, don’t panic if a worker files a Form SS-8. Contact us before replying to the IRS. With a proper response, you may be able to continue to classify the worker as a contractor. We also can assist you in setting up independent contractor relationships that stand up to IRS scrutiny.

© 2019

Consumer Spending Jumps 0.9% in March, while core inflation keeps Fed at bay

According to a report from the U.S. Department of Commerce's Bureau of 
Economic Analysis, consumer spending increased $123.5 million last month. This
was the biggest monthly increase since August 2009 and a 1.5% increase
compared to March 2018's spending.

The surge follows a sharp decrease in December, when consumer spending fell 0.6%. It rose slightly in January and February by 0.3% and 0.1%, respectively.

Personal incomes also rose last month by $11.2 billion, a 0.1% increase from last month. March's income growth is slightly lower than February's 0.2%, but follows a 0.1% decline in January. However, people's personal savings declined from 7.3% in February to 6.5% in March, dropping from $1.16 trillion to $1.03 trillion.

On Friday, the Department of Commerce reported that the gross domestic product increased 3.2% in the first quarter of 2019, a jump that was helped by strong consumer spending. Additionally, the U.S. trade deficit dropped below expectations.

The weakness in income was concentrated in proprietors’ income. Wages and salaries rose 0.4% in March after a 0.3% gain in the prior month.

As a result of the boost in spending and low income, the savings rate fell to 6.5% in March, which is the smallest since November. The savings rate has averaged 6.9% since February 2013.

Headline inflation firmed in March, rising 0.2% after a 0.1% rise in February. This pushed up the year-on-year reading to 1.5% in March from 1.3% in February.

Big picture: The pickup in spending in March adds to the sense that the economy will remain solid in the second quarter after the 3.2% growth rate in the first quarter. Spending was weak in the first three months of the year but is starting the second quarter at a strong pace.

Core inflation is slightly above the 1.5% annual rate that is considered to be the bottom of the Fed’s comfort zone.

Muted inflation is expected to keep the Fed on the sidelines at their meeting this week. Fed officials have said they will be “patient” about further moves in interest rates. The market continues to think the next move by the central bank will be an interest rate cut.

Prepare for the worst with a business turnaround strategy

Many businesses have a life cycle that, as life cycles tend to do, concludes with a period of decline and failure. Often, the demise of a company is driven by internal factors — such as weak financial oversight, lack of management consensus or one-person rule.

External factors typically contribute, as well. These may include disruptive competitors; local, national or global economic changes; or a more restrictive regulatory environment.

But just because bad things happen doesn’t mean they have to happen to your company. To prepare for the worst, identify a business turnaround strategy that you can implement if a severe decline suddenly becomes imminent.

Warning signs

When a company is drifting toward serious trouble, there are usually warning signs. Examples include:

• Serious deterioration in the accuracy or usage of financial measurements,
• Poor results of key performance indicators — including working capital to assets, sales and retained earnings to assets, and book value to debt,
• Adverse trends, such as lower margins, market share or working capital,
• Rapid increase in debt and employee turnover, and
• Drastic reduction in assessed business value.

Not every predicament that arises will threaten the very existence of your business. But when missteps and misfortune build up, the only thing that may save the company is a well-planned turnaround strategy.

5 stages of a turnaround

No two turnarounds are exactly alike, but they generally occur in five basic stages:

1. Rapid assessment of the decline by external advisors,
2. Re-evaluation of management and staffing,
3. Emergency intervention to stabilize the business,
4. Operational restoration to pursue or achieve profitability, and
5. Full recovery and growth.

Each of these stages calls for a detailed action plan. Identify the advisors or even a dedicated turnaround consultant who can help you assess the damage and execute immediate moves. Prepare for the possibility that you’ll need to replace some managers and even lay off staff to reduce employment costs.

In the emergency intervention stage, a business does whatever is necessary to survive — including consolidating debt, closing locations and selling off assets. Next, restoring operations and pursuing profitability usually means scaling back to only those business segments that have achieved, or can achieve, decent gross margins.

Last, you’ll need to establish a baseline of profitability that equates to full recovery. From there, you can choose reasonable growth strategies that will move the company forward without leading it over another cliff.

In case of emergency

If your business is doing fine, there’s no need to create a minutely detailed turnaround plan. But, as part of your strategic planning efforts, it’s still a good idea to outline a general turnaround strategy to keep on hand in case of emergency. Our firm can help you devise either strategy. We can also assist you in generating financial statements and monitoring key performance indicators that help enable you to avoid crises altogether.

© 2019

Exact Capital and HCCI Renovate 650 Affordable Housing Units in Harlem

101 W. 118th St./ Photo credit: Exact Capital

The real estate development firm and the non-profit economic revitalization organization worked together on this $26 million large-scale housing and retail property project.

NEW YORK CITY—Real estate developer Exact Capital and the Harlem Congregations for Community Improvement have renovated and preserved 650 affordable residential rental apartments and 25 stores in Central Harlem, spanning 113th to 152nd streets.

The $26 million project rehabilitated apartments ranging from one to five bedrooms. Renovations included replacing roofs and boilers, repointing, refreshing common areas, and updating kitchens and bathrooms.

Calling the project an “ambitious rehab achievement,” Craig Livingston, managing partner of Exact Capital, says the building rehabilitations preserved much-needed affordable housing in the neighborhood.

“This collaboration with Exact Capital, extends affordability for 29 buildings of HCCI’s 89-building portfolio for another 40 years,” said Malcolm A. Punter, president and CEO of HCCI. The community development corporation that was founded by clergy and local residents works to ensure residents can remain in the rapidly developing neighborhood.

Joan O. Dawson, chairperson of HCCI’s board of directors, notes in the 1990s, HCCI developed the property. Its rental units will remain affordable to lower income residents though a Housing Preservation and Development program.

Stock Bulls Have Come to a Fork in the Road

The S&P 500 Index set a record high on Tuesday, completing an unusually swift rebound from the gut-wrenching decline in the fourth quarter. Global stocks are not far behind. Naturally, the question everyone wants answered is where do we go from here. The answer depends on whether markets begin to take heed of what Morgan Stanley describes as the growing number of “glass half empty” signs cropping up around the global economy or if investors sitting on a surprisingly large amount of cash decide they can no longer afford to sit idly by and miss out on a potential “melt up.”

“There’s too much money in cash,” Bob Michele, the chief investment officer of JPMorgan Asset Management, told Bloomberg TV on Tuesday. “It’s been going into cash the last three years waiting for the Fed to finish hiking rates. They were supposed to finish hiking at the end of this year, not last year. That money has yet to come back into the market.” He’s right. At a recent reading of 71.3, State 

Street’s monthly index of investor confidence is holding around its all-time low. To put that number in context, the index only got as low as about 82 during the financial crisis and was above 100 — the level at which investors are neither increasing nor decreasing their long-term allocations to risky assets — as recently as last summer. The measure has authority because unlike survey-based gauges, it’s based on actual trades and covers 15 percent of the world’s tradeable assets. Money-fund assets stood at $3.04 trillion as of Wednesday, up from $2.88 trillion at the end of October, according to the Investment Company Institute. 

The buildup in money-fund assets between October and March was the most since the period spanning the last three months of 2008 and January 2009. Then again, it’s not surprising that so many investors are so wary, even with unemployment low, inflation under control and the Fed in an accommodating mood.

Cannabis Investments - The New Investment Phenomena Worldwide

The Green Phenomena, is this a thing to stay or a fad or a regulatory nightmare waiting to catch investors......The world renown SALT Conference in Las Vegas 2019 will have a Cannabis Focus with Ron Geffner from Sadis Goldberg speaking. 

Are we reaching a short term Bubble or is this just the beginning of a world investment thesis. 

Global spending on legal cannabis is expected to grow 230% to $32 billion in 2022 as compared to $9.5 in 2017, according to Arcview Market Research and BDS Analytics. The research projects a majority of that, nearly $23.4 billion will come from the United States. In context of more states voting in favor of marijuana use legalization and business interest sparking across the board, that definitely would make sense.

Public to Private to Bonds to Real Estate all going for a little piece of the pie.. Conferences on a global basis focusing on this little Green Magic, even SALT the big alternative conference in Las Vegas will have a session on cannabis lead by Godis

We recently met with a company where I am joining the Advisory Board The House of Green based in Guernsey. The Channel Islands where the exporters to Europe for Tomatoes pre the EU in the 1970s and then Spain undercut them leaving them with many greenhouses, now Guernsey plans to the the Center of Excellence for Europe, and THOG has also joined up with a leading scientist Dr Dorothy Bray who has a US Federal license in THC bringing the US and Europe together for Medicinal and CBD products, which is a very exciting project, but being that our roots in the last 18 years have been financial regulation, our mindset is also on the world of Cannabis and the growth of its regulation on a worldwide basis. 

In the year through January 11, 2019, the United States Marijuana Index, fell 20.7%, as compared to about 6.5% loss seen by the S&P 500. Given that is not exactly an apples to apples comparison, but it does make a case to at least investigate investments in marijuana stocks.

Cannabis is now Schedule 2 drug in the United Kingdom, after the government decided it had medical uses after all. The recent cases of Alfie Dingley and Billy Caldwell, two children needing medicinal cannabis to ease their epilepsy, paved the way for change. Yet Javid has stressed that legal recreational use is “in no way” on the horizon. This despite a recent report stating that cannabis legalisation could save £300 million in policing, criminal justice and drug treatment services, and a June study showing that it could generate annual tax revenues of £3.5bn. The latter is surely an enticing figure. The UK could do with the cash; besides, it’s already the world’s biggest producer of legal cannabis for medical and scientific research (95 tonnes in 2016, 44.9 per cent of the official global total), as well as the biggest marijuana exporter. We are giants. And yet, in terms of recreational business – well, there is no business.

The agriculture industry in the UK has started to recognise the increasing value of hemp as a crop and is expected to increase output and processing capabilities by 200% in the next 5 years.

In hemp varieties grown for seed or fiber use, the plants are grown very closely together and a very dense biomass product is obtained, rich in oil from the seeds and fiber from the stalks and low in THC content.

Much of the hemp grown in the UK in recent decades has been used in the building & construction industry, in a variety of forms, mainly as non-structural building materials and wall insulation. The natural insulating properties and astonishing durability of hemp make it a viable alternative, in terms of technical quality, to traditional materials.

Recent reports indicate that the global cannabidiol (CBD) market is estimated to grow by 700% and could be worth $2.1 billion by 2020. In the UK, the number of people using CBD oil is estimated to have reached around 300,000. The Cannabis Trades Association UK has estimated that UK CBD use has doubled in a year. The CBD market has been thriving in the UK. Although CBD, making medicinal claims, needs to receive a marketing authorization from the MHRA, many companies have set of CBD companies categorised as food supplements.

In that time, the market value for CBD oil in the UK has gone from almost nothing to €57m per annum. The health and well-being market looks likely to capitalize on growing public interest, with CBD-based snacks, suppliments and even skincare products making their way onto shelves.

Bill Gates is supporting the poor and wellbeing, and is finding it hard to give the funds away. Marijuana in many jurisdictions has fulled terror and drug abuse, but if this becomes a global legalised industry and the growing of the product is for the benefit of a stressed planet both for people an animals maybe there is a new area that Bill and Melinda can support a global turnaround - turning the underworld into a positive for the benefit of the planet and mankind.

A New Green Deal -- Investing In The Energy Transition

Investment in the energy transition has grown up; no longer occupying the small socially responsible corner of Wall Street, it has become a central market-based destination for capital all along the risk spectrum, from infrastructure to private equity to venture, as new and improved technologies and consumer demand combine with government tax and regulatory policies around the world to drive robust business models that deliver lower carbon fuels and power and lower carbon industrial and commercial enterprises.

Consumer choices are echoing though the global economy and political choices have moved the markets. Finally, in several sectors, hard economics, based in part upon technological breakthroughs, have become aligned with carbon reduction objectives.

Big business is now backing carbon reduction in big ways starting with big oil itself which is putting capital into low carbon initiatives. Perhaps most emblematic of this trend is American big oil’s use of captured carbon dioxide in enhanced oil recovery, instead of water, effectively returning massive amounts of carbon permanently into the ground where it came from. The amount of industrial carbon capture taking place will likely soar when implementing regulations are issued for “Q45” US tax credits, passed on a bi-partisan basis, also leading to more lower carbon products such as methanol, an alternative fuel.

While anti-fracking activists may not welcome increased use of natural gas, the reality is that natural gas has rapidly displaced coal for the American power grid, and liquid natural gas, along with increased methanol exports, will further decrease the use of coal globally as new liquefaction facilities are permitted and built.

Gas is also the ideal baseload energy source that will facilitate the increased use of wind and solar energy until utility scale batteries are developed, and the continued investment in this resource is key to an ultimate renewable power transition. Meanwhile, methanol is in increasing use as a bunker fuel for shipping, displacing diesel.

Another area of investment focus is in new nuclear power technology. While several countries banned nuclear power following the Fukishima tragedy, the industry has continued to develop the technology and it is hard to argue with the logic of zero carbon emission electricity if it can be safely deployed. Investment in new nuclear generation is growing and safety in the technology will be the main factor in new deployment.

While the early development of wind and solar installations was kickstarted by tax breaks, regulatory requirements and government tariff regimes; increasingly, renewable energy, both at utility scale and from distributed facilities, is producing power on an economic basis as against carbon fuel alternatives with the cost of solar panels falling precipitously. Offshore wind power is also growing dramatically as larger turbine designs are deployed and several States on the East Coast of the United States prepare to host significant capacity.

At the venture end of the investment spectrum, the quest for better battery storage solutions—the innovation that could eventually lead to a much more robust renewables sector—continues, and progress appears to be underway on open air carbon capture.

Governments around the world have played a starring role in setting this in motion, with green energy requirements, tax and regulatory mandates and incentives that have fostered much of this progress. Government funded research has led to many of the innovations that have made this possible, from the work that led to unlocking trapped natural gas, effectively ending the era of big coal, to research being done today to eventually make cold fusion a reality. More government action could dramatically increase the pace, from carbon pricing to additional research to any number of regulatory plans. This is what will be required to limit warming to the 1.5°C goal of the Paris Agreement. Some assortment of these strategies may eventually be combined into US legislative policy as something called the “Green New Deal” or perhaps go by a different slogan or title for political expediency. Were this sort of collective action to go global, real progress is possible.

While a divestiture campaign has sprung up, intended to deny carbon-based energy companies access to capital markets, this well-intentioned effort ignores the inconvenient reality that human activity is fully reliant upon carbon-based energy for now and that an immediate transition is not possible. Oil will be with us for decades, natural gas likely much longer. But progress is being made and, from an investment perspective, a new green deal is already here. There is no reason for an investor today to choose between doing good and doing well, at least in the energy and climate change space.

While divestiture proponents won’t be stock picking the big oil companies any time soon, others may choose from among those making investments in carbon capture like Occidental Petroleum or building gas liquefaction and off-shore wind facilities like Shell. For those who would experience cognitive dissonance investing in the direct oil sector as part of a climate change portfolio, perhaps better to buy shares of power holding companies that are acquiring or developing utility scale solar like Duke.

Infrastructure funds that were originally capitalized with a focus on transportation have pivoted heavily to mid-stream energy, where there are many opportunities in natural gas, as well as renewables. Many of these are exclusively for institutional investors, however several are available to the public such as Brookfield Infrastructure Partners and several Macquarie funds.

Investment more narrowly into renewables is also quite easy. Canadian Solar is busy at both making photovoltaic modules as well as developing utility scale solar installations. Avangrid is a joint venture partner in one of the off-shore wind projects to be developed of the Massachusetts coast.

The more adventurous may look for startups developing next level batteries. While Tesla is by far the most well-known company chasing better storage technology, there are many others as well.

None of this is intended to be a buy recommendation for any particular stock and investors must always do their own research about any company before investing. But each of these strategies represents a part of a now undeniable megatrend and, whatever path one chooses, investing in the energy transition is no longer an aspiration, it is now a powerful portfolio tool.

Stocks climb for 5th day on optimism US-China trade talks will succeed

StocksOpens a New Window. eked out a fifth day of gains on Wednesday as U.S.-China trade talksOpens a New Window. resumed amid hopes that the two sides will soon reach a deal to end the costly tariffOpens a New Window. conflict between the two largest economies in the world.

Technology and chip stocks led the gains with the Philadephia Semiconductor index hitting an all time high.

Gains were pared, however, on a reportOpens a New Window. that U.S. private-sector hiring last month grew by less than expected and also a steeper-than-expected decline last month in service-sector activity.

Carsten Brzeski, chief economist at ING Germany, said trade talks "between China and the U.S. have, for now, produced positive news as a deal has moved closer," according to the Wall Street Journal.

Hiring in the U.S. private sectorOpens a New Window. grew by 129,000 jobsOpens a New Window. in March, according to the ADP National Employment report, missing analyst expectations of 170,000 jobs. February’s tally was revised higher to 197,000 from 183,000.

It marked the slowest employment increase in 18 months, according to Ahu Yildirmaz, the vice president of the ADP Research Institute.

“Although some service sectors showed continued strength, we saw weakness in the goods producing sector," she said in a statement.

Mark Zandi, chief economist at Moody’s Analytics, which partners with ADP on the report, said, “The job market is weakening, with employment gains slowing significantly across most industries and company sizes. Businesses are hiring cautiously as the economy is struggling with fading fiscal stimulus, the trade uncertainty, and the lagged impact of Fed tightening. If employment growth weakens much further, unemployment will begin to rise.”

There is a strong correlation between the ADP private payrolls figure and the government’s nonfarm jobs report due out on Friday. The big miss in Tuesday's ADP report raises the probability that March’s nonfarm jobs number comes in below the estimate of 180,000.

Meanwhile, another report found that strong demand caused China's service sector to rise to a 14-month high in March.

Crude oil prices climbed to a five-month high as the U.S. inventory of the commodity fell by 425,000 barrels. The price of the benchmark U.S. crude, West Texas Intermediate, is now up four days in a row.

In Asia, the Hang Seng closed up 1.22 percent, the Shanghai Composite added 1.24 percent and Japan's Nikkei 225 increased 0.97 percent.

U.S. new home sales hit one-and-a-half-year high on lower mortgages, prices

WASHINGTON (Reuters) - Sales of new U.S. single-family homes rose to a near 1-1/2-year high in March, boosted by lower mortgage rates and house prices.

The third straight monthly increase reported by the Commerce Department on Tuesday suggested some recovery was under way in the housing market, which hit a soft patch last year against the backdrop of higher borrowing costs and more expensive homes.

“In this housing market, affordability for buyers is key,” said Danielle Hale, chief economist at realtor.com. “This trend supports the fact that lower mortgage rates have started to entice buyers this spring and foreshadows a potential strengthening of existing home sales in the months to come.”

New home sales increased 4.5 percent to a seasonally adjusted annual rate of 692,000 units last month, the highest level since November 2017. February’s sales pace was revised down to 662,000 units from the previously reported 667,000 units. Economists polled by Reuters had forecast new home sales, which account for 11.7 percent of housing market sales, decreasing 2.5 percent to a pace of 650,000 units in March.

New home sales are drawn from permits and tend to be volatile on a month-to-month basis. They increased 3.0 percent from a year ago. The median new house price dropped 9.7 percent to $302,700 in March from a year ago, the lowest level since February 2017. The drop was because of an increase in the share of homes sold in the $200,000-$300,000 price range.

Away from the new housing market, overall house price inflation is slowing. A separate report on Tuesday showed the Federal Housing Finance Agency (FHFA) house price index rose a seasonally adjusted 4.9 percent in February from a year ago.

That was the smallest gain since early 2015 and followed a 5.6 percent increase in January.

The FHFA’s index is calculated by using purchase prices of houses financed with mortgages sold to or guaranteed by mortgage finance companies Fannie Mae and Freddie Mac. The moderation in house prices was set in motion by last year’s slackening in demand, which was triggered by higher mortgage rates.

STRONG FUNDAMENTALS

The 30-year fixed mortgage rate has dropped by about 80 basis points since November, according to data from Freddie Mac. That followed a recent decision by the Federal Reserve to suspend its three-year monetary policy tightening campaign. Wage growth has picked up, also making home purchasing more affordable for some working Americans.

The PHLX housing index was trading higher, also tracking a higher U.S. stock market. The dollar firmed against a basket of currencies. Prices for U.S. Treasuries rose.

New home sales have not been as severely impacted by the supply problems that have plagued the market for previously owned homes. A report on Monday showed home resales tumbled in March, weighed down by a persistent shortage of lower-priced houses.

Despite the strengthening housing market fundamentals, land and labor shortages are constraining builders’ ability to break more ground on lower-priced housing projects. Expectations for slower economic growth this year are also seen curbing demand.

“We expect that a slowing economy will keep housing demand in check, and house price growth will continue to slow to around 2 percent by the end of 2019,” said Matthew Pointon, property economist at Capital Economics in New York.

Economists believe housing probably remained a drag on gross domestic product in the first quarter. Investment in homebuilding contracted 0.3 percent in 2018, the biggest drop since 2010.

In March, new home sales in the South, which accounts for the bulk of transactions, increased 3.6 percent to their best level since July 2007. Sales in the Midwest soared 17.6 percent to an 11-month high, while those in the West surged 6.7 percent to their strongest level in a year. But sales in the Northeast tumbled 22.2 percent.

There were 344,000 new homes on the market last month, down 0.3 percent from February. At March’s sales pace it would take 6.0 months to clear the supply of houses on the market, down from 6.3 months in February. About 62 percent of the houses sold last month were either under construction or yet to be built.

Have you recently started a new business? Or are you contemplating starting one? Launching a new venture is a hectic, exciting time. And as you know, before you even open the doors, you generally have to spend a lot of money. You may have to train workers and pay for rent, utilities, marketing and more.

Entrepreneurs are often unaware that many expenses incurred by start-ups can’t be deducted right away. You should be aware that the way you handle some of your initial expenses can make a large difference in your tax bill.

Key points on how expenses are handled

When starting or planning a new enterprise, keep these factors in mind:

1. Start-up costs include those incurred or paid while creating an active trade or business — or investigating the creation or acquisition of one.
2. Under the federal tax code, taxpayers can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs in the year the business begins. We don’t need to tell you that $5,000 doesn’t go far these days! And the $5,000 deduction is reduced dollar-for-dollar by the amount by which your total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized over 180 months on a straight-line basis.
3. No deductions or amortization write-offs are allowed until the year when “active conduct” of your new business commences. That usually means the year when the enterprise has all the pieces in place to begin earning revenue. To determine if a taxpayer meets this test, the IRS and courts generally ask questions such as: Did the taxpayer undertake the activity intending to earn a profit? Was the taxpayer regularly and actively involved? Has the activity actually begun?

Examples of expenses

Start-up expenses generally include all expenses that are incurred to:

• Investigate the creation or acquisition of a business,
• Create a business, or
• Engage in a for-profit activity in anticipation of that activity becoming an active business.

To be eligible for the election, an expense also must be one that would be deductible if it were incurred after a business began. One example would be the money you spend analyzing potential markets for a new product or service.

To qualify as an “organization expense,” the outlay must be related to the creation of a corporation or partnership. Some examples of organization expenses are legal and accounting fees for services related to organizing the new business and filing fees paid to the state of incorporation.

An important decision

Time may be of the essence if you have start-up expenses that you’d like to deduct this year. You need to decide whether to take the elections described above. Recordkeeping is important. Contact us about your business start-up plans. We can help with the tax and other aspects of your new venture.

© 2019

OIL DELIVERS WIN TO HEDGE FUNDS

The price of oil surged as much as 3 percent Monday after the Trump administration said it would not renew waivers that let countries buy Iranian oil without facing U.S. sanctions. Logically, this should have hit the equity markets pretty hard. After all, with all the talk about a looming recession, companies and consumers surely wouldn’t be able to weather a rise in energy prices. But in a sign that perhaps the economy is doing just fine, equities managed to hold up fairly well.

The biggest “up arrow” came from the Dow Jones Transportation Average, whose members include railroad Norfolk Southern Corp., package delivery company FedEx Corp. and trucking firm J.B. Hunt Transport Services Inc. The one sector that should be hit hard from rising oil prices was little changed on the day, bringing its year-to-date gain to 19.7 percent, which outpaces the 13.7 percent surge in the more diverse Dow Jones Transportation Average. As for the economy, the Federal Reserve Bank of Atlanta’s GDPNow Index, which aims to track growth in real time, has risen to 2.79 percent from a “stall speed” level of 0.17 percent in mid-March. While that’s not above the 3 percent level desired by the Trump administration, it’s a respectable number given that inflationary pressure — at least as measured by the government — is nowhere to be seen. And although the S&P 500 Index is less than 1 percent from its record closing high set in September, more and more strategists are saying the recent rebound has room to run if for no other reason than there is so much pessimism toward equities and the economy. In a report titled “‘Wall Of Worry’ Taller Than Trump’s Border Wall!”, Leuthold Group Chief Investment Strategist Jim Paulsen points out that a broad measure of market concern is as high as it has ever been since 1970. And that’s a good thing for equities, with average annualized returns of about 18.5 percent in the following 13 weeks compared with 10.5 percent the rest of the time.

Bullish Signal

Transport stocks outperform the broader market despite the surge in oil prices

The measure Paulsen references is the price of gold relative to the broader commodities market divided by the price of small capitalization stocks relative to the S&P 500. “Overall, this bull market has epitomized the power of a ‘Wall of Worry,’” Paulsen wrote in a research note. “Born without buyers and driven by reluctant investors gaining participation by cautiously nibbling only at its most defensive corners.”

BUYBACKS MAY BE A DYING BREED

That’s not to say there isn’t plenty for equity investors to be worried about. Perhaps the biggest concern is the potential for a marked slowdown in share buybacks, especially if a sluggish economy prompts corporate executives to redirect cash toward deleveraging. At the heart of the issue is the more than doubling of the size of the U.S. investment-grade debt market since 2008 to about $5 trillion. About half is composed of bonds in the triple-B tier — those with BBB+, BBB or BBB- ratings — which have more than tripled. It’s here, in the lowest investment-grade category, where investors are most worried because anything rated BB+ or lower is considered junk. The strategists at Bank of America pointed out in a research note Monday that of the 45 percent growth in earnings per share for members of the Russell 3000 index — excluding financials, utilities and real estate sectors — some 12 percentage points could be attributed to buybacks. “Late 2018 was the turning point in this cycle of expanding debt balance sheets, buying growth and rewarding shareholders, in our opinion,” the Bank of America strategists wrote. The combination of rising interest rates and the broad “market dislocation” in the fourth quarter “played the role of a wake-up call to the largest bond issuers,” they added, pointing out that the yield spread on the bonds for many issuers rated BBB widened to more than 2 percentage points, which is a level usually reserved for junk bonds. “Today, the game has changed. Three times as many investors want companies to pay down debt than to buy back stocks, and the cost of equity capital reflects this: the relative multiple of levered companies (versus) cash-rich companies is now at a 7 (percent) discount to history.”

On Borrowed Time

Stocks with the most buyback activity have outperformed, but that may soon end

OIL DELIVERS WIN TO HEDGE FUNDS
The rally in oil Monday brought to 54 percent the gain in West Texas Intermediate crude since its late December lows. And for what seems the first time in a long time, hedge funds are getting it right when it comes to betting on oil. Money managers boosted optimistic wagers on West Texas Intermediate crude to the highest since October in the week ended April 16, according to Alex Nussbaum and Caleb Mutua. U.S. Commodity Futures Trading Commission data released Friday showed the net-long WTI position— the difference between bets on higher prices and wagers on a decline — rose 10 percent to 303,366 futures and options contracts. Long positions climbed 8.4 percent while shorts declined 6.5 percent. Another way to look at this is that hedge funds are betting against President Donald Trump. In the wake of the move against Iran, Trump tweeted that “Saudi Arabia and others in OPEC will more than make up” for any drop in supply from Iran. Saudi Energy Minister Khalid Al-Falih said the Saudis would coordinate with fellow producers to keep adequate supplies available to consumers while ensuring the oil market “does not go out of balance.” Both Saudi Arabia and the U.A.E. are ready to boost output to offset any drop in output from Iran and can increase their combined production by about 1.5 million barrels a day within a short period, Bloomberg News reported. The additional oil would more than compensate for losses from Iran, which shipped about 1.1 million barrels a day of crude and condensate in the first half of April. To be sure, Trump has tweeted a number of times in the past year or so that OPEC needs to boost production, but the cartel has actually been quite successful in cutting supplies to support prices.

Pulling Away

Oil's gain this year has far exceeded the broader commodity market

BOND TRADERS AREN’T WORRIED. YET.

The big issue for the bond market whenever oil spikes higher is whether the move will prove to be inflationary or a drag on growth. For now, yields are suggesting it’s the latter. Despite WTI prices reaching almost $67 a barrel on Monday, the highest since October, breakeven rates on five-year Treasuries — a measure of what bond traders expect the rate of inflation to be over the life of the securities — are only their highest since last month at 1.88 percent. In October, they were above 2 percent. The most immediate impact on consumers will be at the pump, where prices for a gallon of regular grade gasoline have risen to an average of $2.84 heading into the all-important summer driving season, according to the Automobile Association of America, up from January’s low of $2.23 a gallon. This wouldn’t be too hard for consumers to weather in a robust economy with rising wages, but that’s not happening. The U.S. government’s monthly jobs report showed that average hourly earnings rose just 0.1 percent in March, below the 0.3 percent increase that was forecast by economists. And on Friday, the government’s report on gross domestic product for the first quarter is forecast to show that personal consumption grew at a sluggish 1 percent pace. If true, then the only quarter lower since 2013 would be the first three months of 2018, when consumption rose by just 0.5 percent. To be sure, the bond market isn’t overly complacent about the inflationary impact from rising oil prices. Breakeven rates have jumped from this year’s low of 1.48 percent in early January, tracking the rise in oil prices higher fairly closely.

Mildly Concerned

Inflation expectations in the bond market are up but remain below last year's levels