Malley & Franey Financial Group, Inc.

Education Tax Credits

Jan 302012

The cost of higher education continues to rise. Education credits are one way that the federal government helps families to offset expenses for higher education. The two main education credits are the American Opportunity Credit and the Lifetime Learning Credit.

The American Opportunity Credit is available for the first four years of qualified college expenses. The taxpayer can claim the credit for herself, her spouse, or an individual eligible to be claimed as her dependent. The maximum credit per student per year is $2,500, with 40% of the credit being refundable. Therefore, the taxpayer’s income tax liability may be reduced by up to $2,500 and she may receive a refund of up to $1,000 even if the credit exceeds her tax liability. The credit phases out for married couples filing jointly with an AGI over $180,000, and for single and head of household filers with an AGI over $90,000.

In contrast to the American Opportunity Credit, the Lifetime Learning Credit is available for all years of post-secondary education and for courses to acquire or improve job skills. The maximum credit is $2,000 per student per year; however, the credit is not refundable. Taxpayers may claim either credit each year for as many students as are eligible, but cannot claim both the American Opportunity Credit and the Lifetime Learning Credit for the same student in any one year. The Lifetime Learning Credit phases out for married couples filing jointly with an AGI over $122,000 and for single and head of household filers with an AGI over $61,000.

When claiming the education credits, taxpayers need to be cognizant of the year in which the education expenses are actually paid. The educational institution is required to send each student a 1098-T form each year to assist the taxpayer in determining her eligibility for the education credits. However, the 1098-T form often includes the amounts billed to a student during the tax year rather than the amounts paid by (or on behalf of) the student. For example, the 2011 1098-T form may show a total amount of tuition billed during 2011, including amounts billed in December. However, the taxpayer may not have paid the amount billed in December until January 2012. If this is the case, she is not entitled to a credit on her 2011 tax return for the amount paid in January even though the amount is included on the 2011 1098-T form. Therefore, the taxpayer needs to maintain records in addition to the 1098-T form that show the amount of higher education expenses actually paid during the year, or the IRS may disallow the credit.

So How Much Does Your Business Neighbor Really Pay For Rent?

Operations No Responses »

Jan 092012

Many years ago when my employer was contemplating a move to a new office, colleagues were touting the cheap rent in an undeveloped part of the city. At that time, we were paying about $20/ft² and the market was trending towards $25; the colleagues were talking about $7/ ft²in the new neighborhood. Immediately there was a call to our broker asking why we were being shown space in the $25/ft² range when $7 was available. Well, they answered, if you wanted to fund the TI (tenant improvements) from the bare girders out, you could get shell space for $7 and then pay $25+/ ft² for bare bones TI…and good luck with getting a bank to finance that!

Another rent item that’s not evident in a public quote is the number of months of free rent a landlord might offer. For example, they may quote renting a space at $30/ ft², but that’s the rate charged after the free rent period has finished. If this were a 5 year lease and the first 6 months were free, then the effective rate over the 5 year term is $27/ ft².

TI can be a significant item when comparing competitive office space quotes. Most times a new tenant will receive a TI allowance to fund at least some basic sprucing up. For example the allowance might cover replacing the old carpeting, repainting the walls, replacing some worn ceiling tiles, etc. If the allowance goes beyond this, for example, to provide for the building of new offices, conference rooms and an eat-in kitchen, you’ll want to know the value of that construction. The quality of the items as well as the number of offices required, for example, can be a distinguishing factor from one space to another.

Qualitative factors aside, a quantitative analysis can help evaluate competing quotes. The price paid for the pure rent cost should be determined. The rent/ft² quote should be netted down for the value of the free rent period, TI and any other allowances. Parking space allowances can be significant if you would be in an area that requires parking fees. Once you have the pure rent and TI pieces identified, then you can quantify any costs you will have to absorb as a tenant. For example, the TI allowance might not be sufficient for your space to be fully functional for your company’s needs. Those out-of-pocket costs along with any related financing costs need to be factored in.

So the next time someone brags about the great lease deal they closed that soundly beats the market price, ask a couple of questions.

NEHI: Innovators in Health Awards Dinner

Events No Responses »

Dec 072011

On November 9, 2011, one of our clients, NEHI (formerly known as the New England Healthcare Institute) http://www.nehi.net/ , held their annual Innovators in Health Awards Dinner. This year’s awardees were Donald M. Berwick, MD, Administrator of the Centers for Medicare and Medicaid Services (CMS), Dean Kamen, Founder of DEKA Research and Development Corporation, and Thomas M. Menino, Mayor of Boston. Approximately 200 NEHI members and their guests attended the event.

Dr. Berwick was recognized for his innovative contributions to the nation’s health and health care. As a physician, policymaker and professor, he has been a tireless advocate for patient safety and for improving quality and lowering the costs of health care. At the Institute for Healthcare Improvement, Dr. Berwick launched the 100000 Lives Campaign which saved over 120,000 lives in the first 18 months of implementation. At CMS, Dr. Berwick took the initiative one step further and launched the Partnership for Patients to improve quality for millions of Americans and save $35 billion across the health care system.

While he is best known as the inventor of the Segway, Dean Kamen holds more than 440 patents, many in the healthcare field. They include the first portable infusion pump, a portable dialysis machine, a vascular stent and a motorized wheelchair that climbs stairs. In 1989, he established FIRST® (For Inspiration and Recognition of Science and Technology) to inspire teenagers to pursue careers in science. His current projects include water purification for developing countries and prosthetic arms for maimed soldiers.

In an effort to improve primary care access for residents, Mayor Menino created a Task Force on Improving Access to Primary Care to evaluate the current state of care in Boston, examine challenges and make policy recommendations for increasing access. In addition, he aims to reduce obesity rates in children by 30 percent, and by 20 percent in adults in the next five years, with a specific focus on reducing the gap in rates among minority groups. This campaign included prohibiting the use of trans fats in restaurants; a ban on the sale, advertising and promotion of sugar-sweetened beverages in municipal buildings; and a state-of-the-art bike sharing program, Hubway, to give people a healthy and green way to travel around the city.

2011/2012 Tax Update

Individual Taxes No Responses »

Nov 142011

New amounts have been announced for the 2012 tax year (affecting the tax return to be filed in 2013). The standard deduction has increased for single filers from $5,800 in 2011 to $5,950 for 2012, for married couples filing jointly from $11,600 in 2011 to $11,900 for 2012, and for heads of household from $8,500 in 2011 to $8,700 for 2012. In addition, the personal exemption has increased from $3,700 in 2011 to $3,800 for 2012. Also, high income taxpayers will not be subject to a phase-out of their itemized deductions or personal exemptions. These phase-outs were eliminated for the 2010 tax year but set to return in 2011 and subsequent years. The itemized deduction and personal exemption phase-outs will not return until the 2013 tax year (for tax returns filed in 2014).

Social security benefits will increase 3.6 percent in 2012. In addition, the social security wages base will increase to $110,100 in 2012, up from $106,800 in 2011.

The pension and retirement plan contribution amounts for 2012 have also recently been announced. The maximum contribution to a 401(K), 403(b) or 457 plan has been raised $500, from $16,500 in 2011 to $17,000 for 2012. The maximum contribution to a SIMPLE plan remains the same, at $11,500 for 2011 and 2012. The catch-up contribution for taxpayers 50 years or older also remains unchanged, at $5,500 for both 2011 and 2012. For taxpayers who make a contribution to a traditional IRA, the deduction is phased out for single and head of household filers who are covered by a workplace retirement plan with an adjusted gross income between $58,000 and $68,000 in 2012 (versus $56,000 and $66,000 in 2011). For couples that are married filing jointly, the deduction is phased out for a spouse covered by a workplace retirement plan with an adjusted gross income between $92,000 and $112,000 (up from $90,000 to $110,000 in 2011). For a taxpayer not covered by a workplace retirement plan but with a spouse that is, the phase-out range in 2012 is between $173,000 and $183,000 (up from $169,000 and $179,000 in 2011).

Any taxpayer, regardless of income, may still convert an IRA to a Roth IRA; however, beginning in 2011 the entire tax on the conversion must be paid in the year of the conversion. The option to split the tax payments over two years was available in 2010 only. While anyone can convert an existing IRA to a Roth IRA, income limits remain for Roth IRA contributions. For single and head of household filers the income phase-out range for Roth IRA contributions is between $110,000 and $125,000 for 2012 (up from $107,000 to $122,000 in 2011). The income phase-out range for married couples filing jointly is $173,000 to $183,000 in 2012 (up from $169,000 to $179,000 in 2011).

Chapter 11 or Secured Party Sale

Turnaround No Responses »

Oct 242011

An article I read in the American Bankruptcy Institute Journal is worthy of mention. Reorganizations as we once knew them have been set aside for the new Chapter 11 which consists of selling a company’s assets under Section 363 of the Bankruptcy Code. While these types of sales have become popular, there have been an increasing number of cases where debtors sell their assets outside the context of a Bankruptcy Court often times through a vehicle known as a secured party sale. A secured party sale is governed by Article 9 of the Uniform Commercial Code. Article 9 does not address the claims of unsecured creditors on the successor corporation.

The acquirer is buying the assets of the debtor company without assuming the liabilities of said company. Although this is certainly a legitimate way to purchase assets from an insolvent entity, there have been some recent cases where the purchaser of the assets can be held liable for the debtor’s liabilities.

A successor corporation can be held liable if the plaintiff can show (1) the successor expressly or impliedly agreed to assume the liability of the seller corporation; (2) the transfer was a “de-facto” merger or consolidation; (3) the successor is a “mere continuation” of the seller corporation; or (4) the transaction was “fraudulent”.

In instances where there is no fraud or agreement to assume liabilities, the terms “mere continuation” should cause some concern. The article states that courts will consider, “whether the successor is substantially the same as the predecessor company”. Although there are certainly legal arguments to combat these assertions the very fact that you are in court is contrary to the reasons for doing a secured party sale in the first place.

Reference Article: “Will New Successor Liability Cases Send Companies Back to Chapter 11 for Asset Sales”, American Bankruptcy Institute Journal, February 2010
Contributing Editor:
Richard E. Mikels, Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC; Boston
Also Written by:
Adrienne K. Walker, Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC; Boston

Financial Forecasts & Planning for Uncertainty

Budget & Forecasting, Small Business Accounting No Responses »

Oct 032011

My favorite comedian of all time is Buster Keaton. He is widely recognized as one of the top 3 silent film comedians, along with Charlie Chaplin and Harold Lloyd. Buster is also known as one of the greatest stuntmen ever. Watch the final 15 minutes of Steamboat Bill Jr. and you’ll understand why.

Buster took many risks performing those stunts. Most of the risks were anticipated and were carefully planned into the films. For example, judged the riskiest stunt in silent film history is one of Buster’s iconic scenes and is a part of the final 15 minutes of Steamboat Bill Jr. He is seen standing in the middle of a street during a cyclone when the facade of a house collapses towards him. Amazingly, Buster happens to be standing where the facade’s open second story window falls and he emerges unharmed. This was a calculated risk. Buster and the film crew took measures to minimize the risk of Buster being killed by the façade. The size of the window gave Buster all of 2” clearance on either side of his body. A nail was placed at the exact spot where Buster needed to stand. The façade was a fully-formed, heavy-weight unit so that the movie’s manufactured hurricane-like winds would not blow the building unit off of its intended path.

In business, senior management takes many risks. They occur during contract negotiations, determining which product to develop, evaluating which distribution channels and markets to pursue, what employees to hire, etc. These risks, hopefully, are carefully planned within the context of a fully-formed business plan. One of the results from a business plan is a forecast, usually 3 to 5 years forward. The plan should have a balance sheet, P&L and cash flow forecasts. Questions arise as to how much effort needs to be placed in projecting the various elements of the forecast and how frequently the forecast should be updated.

Broadly speaking, in today’s environment, revising the forecast should be an ongoing effort. In general, the greater the materiality and the higher the variability, or β in stock terms, the more frequent the items should be reviewed. For example, revenue projections generally fall into this category. Everything from the 4 Ps to general market conditions should be reviewed frequently. Like Buster’s nail in the ground, you need to know each day/week where revenues are headed so you can plan everything from inventory needs to headcount requirements and so on. Other items require a far less frequent review. Many companies will find that their facility costs will remain static over a long period of time and that their costs may not be that material to the company’s bottom line.

But some risks appear from nowhere and not only to require management to react swiftly but also to have anticipated the incident or its ramifications. Going back to Buster, in his film Sherlock Jr., he is seen running across the top a moving train. As he runs out of train, he leaps and catches the chain of a railroad water tower. His weight causes the chain to be lowered and, with that, water comes pouring out of the spout and knocks Buster to the tracks. He then gets up and runs away. Filming was suspended the next two days because Buster was sore and experiencing headaches. About a decade later while examining x-rays during a physical exam, Buster’s physician asked him when he broke his neck. At first Buster couldn’t recall any time, and then remembered that Sherlock Jr. scene.

That was a risk neither Buster nor the film crew anticipated. But senior management cannot ignore planning for an unexpected risk. Management needs to have a back-up plan prepared in advance for such things as natural disasters, health epidemics and, God forbid, terrorist attacks. How will you maintain communication with your employees, customers, vendors and those who have financed your business? Does your business plan have a worst case scenario wherein you plan for a three or six month delay in funding? What if revenues are cut in half due to economic conditions beyond your control? These extraordinary events must be “forecasted” and made part of an implementation plan, reviewed with management and then updated periodically.

Steamboat Bill Jr. collapsing facade

Sherlock Jr. railroad water

Paying the Landlord?

Operations No Responses »

Sep 122011

While sipping wine at a winery recently I noticed that while there were plenty of people sitting around the bar, enjoying the pleasant conversation about the various nuances of the wines being sampled, there were very few bottles actually purchased after the free sampling was done.

The proprietor of the business who is acquainted with me and knows what I do for an occupation indicated to me that she is having some financial difficulties, most of which are centered around the amount of rent paid for the business. She went on to tell me that she is looking at possibly breaking the lease and moving her business to a location where the rent would be about half.

The problem with the location where the rent would be substantially reduced is that there would be much less traffic and that may have an even worse effect on the business. I have worked with a number of clients recently where we have discussed the current economics with their landlords and have come up with both short and mid-term concessions that would alleviate the need for their tenants to move on.

As tenants are having difficulties, so are their landlords and a tenant that pays, even a reduced amount is certainly better than a vacant location. One concession that most landlords want include some sort of percentage rent which is basically an escalator in the amount of rent paid if sales exceed a certain level. This makes sense and allows a landlord to enjoy some upside if their tenant succeeds while providing a company with some breathing room when they need it most.

Why Fraud Now

Operations, Turnaround No Responses »

Aug 292011

Fraud is all over the news these days. The topic of forensic accounting has become in vogue. The Turnaround Management Association of New England recently put on a symposium with several panels to discuss fraud on commercial lenders. The speakers discussed fraud on several asset classes including accounts receivable, inventory and cash. There were many accountants and bankers present.

The conclusion was that it will generally not be detected unless you are looking for it specifically. Most importantly, it was noted that the fraud is most often perpetuated by the “trusted employee”. The old auditing mantra of asking more questions when the $80,000 a year Controller drives to work in a Ferrari is still valid. I actually saw this happen once only the Controller was driving a Lotus, not a Ferrari. He was indicted a few years later.

In the several years prior to mid-2008 when the economy seemed to go into a freefall, oversight was seen as an overhead function which hindered “getting the deal done”. Many banks went from performing quarterly due-diligence exams to annually or not at all. When the economy started to falter and lenders started to, “open up the hood”, lots of surprises came to the forefront.

When one attempts to liquidate collateral in a distressed situation, you see the real value of what is left, this applies to both inventory and accounts receivable. A little oversight and strong internal controls help minimize situations where fraud occurs.

Thorny Creditors

Turnaround No Responses »

Jul 252011

In the turnaround work that I have been doing recently I have noticed increased levels of pressure from trade creditors in general. I will often serve as the point person between the financially strapped company and its creditors, hence, I receive the creditor calls.

The timeline between an account going beyond its terms to the next phase which is generally a collection agent to the final phase which is collection counsel has been reduced in these troubled times. The reason for this is strained cash flow all over the board.

Company owners with a desire to want to avoid a lawsuit or judgment will often want to jump in with both feet and offer money in order to neutralize the situation. The problem with doing that is it indicates that the company has the ability to satisfy the claim which may or may not actually be the case.

There are many instances where it is preferable to let discussions take their course and let some time pass in order to determine where your company is going. Financially distressed firms have a very limited budget so it is critical to utilize those dollars only when it is absolutely necessary.

Grants, Part II

Grants No Responses »

Jul 052011

One of the requirements that a federal agency award grantee must have is an accounting system that allows it to properly track the expenses of its personnel related to the grant award. The NIH, for example, prescribes the use of a timekeeping system. The system may be manual or automated but, in either case, should have a series of controls that ensure the accurate recording and monitoring of each staff person’s activities.

An underlying concept for the timekeeping system is that the cost associated with a grant be based on the actual hours worked by each individual divided into their actual rate of pay for each pay period. For example suppose that a grantee company pays their employees on a semi-monthly basis. Further assume that all employees are paid a regular salary, i.e., no hourly rates. Now suppose that employee A is paid $3,000 per pay period. In the 1^st half of the month, A worked a total of 100 hours of which 50 were dedicated to grant activities. In the 2^nd half of the month, A worked a total of 80 hours of which 50 were dedicated to grant activities. For the 1^st half of the month, $1,500 would be allocated to the grant ($3,000 x 50 hours ÷ 100 hours). In the 2^nd half of the month, $1,875 would be charged to the grant ($3,000 x 50 hours ÷ 80 hours).

An additional complexity related to the tracking of time for paid time off, e.g., vacation, holiday, etc. That category of activities is considered by federal agencies to be a part of benefits and plays a major part in the determination of allowed benefit rates. For the NIH, this is administered by the Office of Acquisition Management and Policy http://oamp.od.nih.gov/dfas/IdCSubmission.asp .

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