plura Financial Blog

blog for plurafinancial.com, an online matchmaker between banks & small businesses

Archive for June 2012

The Impact of the Proposed Changes in Capital Gains Rates

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Much has been discussed in the media, and in family circles, regarding the potential implications of the “Bush tax cuts” set to expire at the end of 2012.  Not being tax folks, but interested in the impact, we decided to research the issue to get a layperson’s understanding of what exactly is supposed to change and how it might affect most people.  After much research, two sources proved to be the most helpful – the IRS.gov and the Goldman Sachs (www.gs.com) websites.  Here’s a summary of our key findings from these sources:

Background

  • All of the primary Bush era income tax cuts are scheduled to expire at the end of 2012 under the law’s “sunset” provisions if Congress does not act (and “sunset” occurs).
  • While the Administration has proposed continuing to tax dividends at capital gains rates in the future, if no action is taken and sunset occurs, qualified dividends will be taxed at ordinary income rates instead of the lower capital gains rate at the end of 2012.

Potential Impact

  • The 2013 income tax rates for most taxpayers will increase.
  • Income tax rate changes from 2012 to 2013 that would result in the event of sunset are listed in the chart to the right (tax brackets for married couples filing jointly):
After giving effect to all the sur-taxes and stealth taxes, the effective tax rates for the highest bracket of earners will be as follows:
  1. Includes marginal income tax change, investment income surtax and stealth tax change
  2. Includes marginal income tax change, stealth tax  change and Medicare tax change

Proposed Tax Law Changes – A Detailed Look

  • The highest earners (>$379,150 of household income) will realize the largest tax % increases in 2013.
    • Ordinary income rate goes from 35% to 39.6% (a 13.1% increase)
    • Long-term capital gains rate goes from 15% to 20% (a 33.3% increase)
    • Qualified dividends rate goes from 15% to 39.6% (a 164% increase).
  • Itemized deductions to be less favorable
    • The tax rule reducing a taxpayer’s itemized deductions by a specified percentage of the amount by which adjusted gross income (AGI) exceeds a threshold does not apply in 2012 but returns in 2013. The limitation occurs on Schedule A, tax Form 1040.
    • In 2013, the reduction will equal the lesser of (i) 3% of that excess income or (ii) 80% of the itemized deductions (such as charitable contributions) subject to this rule.
    • For a taxpayer with $5 million of AGI in 2013, deductions will be reduced by about $145,000.
    • This rule is often referred to as a “stealth tax” because reducing deductions by 3% of the excess AGI potentially increases the 2013 marginal tax rate thereon from 39.6% to 40.8%.
  • Investment income may receive a 3.8% surtax for folks making >$200k.
    • The health care reform law enacted in 2010 includes a new 3.8% surtax on investment income (such as gains, interest and dividends) for individuals with AGI in excess of $200,000 and married couples with AGI in excess of $250,000. This surtax begins in 2013.
    • Surtax increases the top marginal rate on investment income, other than long-term capital gains (and possibly qualified dividends), to 43.4% (or 44.6% taking into account the aforementioned “stealth tax”).
    • Surtax increases top long-term capital gains rate to 23.8% (or 25% taking into account the “stealth tax”).

At first glance, it would appear that the wealthiest people are being punished the most.  Though some would argue that, based on the chart below, the rich have been getting favorable tax breaks for the last thirty years that are finally going away; here’s a chart of the historical Long Term Cap Gains tax rates per IRS.gov and the US Treasury Department:

Regardless of your opinion about the fairness and distribution of the tax changes, the implications are significant for all; be sure to consult with your tax advisor if these changes take place!

-James Timberview/www.pluraFinancial.com

Disclaimer: As Goldman points out, information related to amounts and rates set forth under U.S. tax laws are drawn from current public sources, including Goldman Sachs’ April 2012 report on “The Potential Impact of Planned Tax Rate Increases on After Tax Values” and  the Internal Revenue Code of 1986, as amended, as well as regulations and other public pronouncements of the U.S. Treasury Department and Internal Revenue Service. Such information may be subject to change without notice. In some cases, rates may be estimated and may vary based on your particular circumstances.

Written by entrabanker

June 21, 2012 at 8:38 pm

SBA Loan Statistics for 7A and 504 Loans, through 6/8/2012

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From the blog of pluraFinancial.com, here are the latest SBA loan statistics for SBA 504 and 7A loan approvals, through 6/8/2012:
  • Summary: The 2012 SBA loan trend continues…
    • On a Year-to-Date basis, SBA 7A Loan approvals are down 34% through 6/8/2012 according to sba.gov
      • The 7A Loan’s higher SBA guarantee fees and lower amortization relative to the SBA 504 Loan is attributed to part of the decline in 7A Loans as demand shifts toward 504 Loans.
      • Existing businesses and rural businesses in particular appear to be fleeing SBA 7A loans.
    • SBA 504 Loan approvals are up 27% YOY
      • Borrowers appear to prefer the ability to refinance existing debt, and the relatively low rates & fees associated with SBA 504 Loans
  • A closer look into the numbers: On a YTD basis, total SBA loan approvals were down $4.1 Billion, or 23% YOY
    • SBA 7A Loan approvals were down $4.9B YOY, or 34%, responsible for 100% of the YOY total SBA loan decline
      • 7A Loan approvals to existing business were down $4.1B
        • Loans to Rural businesses were down $1.8 B
        • Loans to Asian-American owned businesses were down $0.9B
        • PLP loans represent ~half of all 7A loans, and were down 57% YOY
      • 7A Loan approvals to startups were down $0.8B
        • Express loans, a popular SBA loan product for startups, were down $0.7B YOY
      • 7A Loans represented 82% of SBA Loans last June, and currently represent 71%.
    • SBA 504 Loan approvals were up $0.8B, or 27% YOY
      • Loans to Existing businesses were responsible for ~90% of the 504 Loan growth.
      • Approvals were up in nearly every SBA 504 loan category (minorities, existing businesses, startups, rural businesses, etc.)
  • Projections: We expect a continued shift toward SBA 504 loans in 2012 given the favorable rates and amortization relative to other SBA loan products.  This assumes the SBA will continue to permit 504 loan proceeds to refinance existing debt.  
-James Timberview/www.plurafinancial.com

Written by entrabanker

June 21, 2012 at 4:43 pm

When to Raise Capital (Part 1 – When To Raise Debt)

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-Brandon Hinkle/plurafinancial.com

There’s a popular saying in banking that it’s always best to request a bank loan when you don’t need it.  And there’s a popular saying in entrepreneurial circles that a banker is one who gives you an umbrella when it’s sunny outside, and takes the umbrella away when it’s raining.  Either way, you should always seek money before you need it.  This is particularly true for debt financing.

When To Raise Debt For Your Business

If you foresee a need for cash in the future, and if you can prove your company has the ability to quickly repay a loan (plus interest), than you should start seeking a bank loan.

  • Criteria: See What banks look for in a business loan to better understand the bank requirements for debt, but suffice to say the bank needs to know your business has the wherewithal to repay a loan on time, plus interest.  You usually also need to put at least 20% of your own capital into the project being financed.
  • Favorable attributes of debt:
    • The ability to put other people’s money at risk (instead of your own) without giving up ownership.  Private equity folks get rich with this strategy.  Warning: too much debt can strangle a company.
    • Over the long term, debt is cheaper than equity (if you believe your business has meaningful value).
    • Loan interest (expense) can reduce the company’s taxable income.
    • Debt forces financial discipline; it’s harder to make risky investments when the company has loan payments to make each month.
  • $ Cost of debt: A traditional bank loan generally charges 5%-7% annual interest.   Sometimes the interest rate is variable, sometimes it’s fixed.  Fees generally range from 0% to 3% of the loan amount, depending on the bank and loan type.
  • Hidden cost of debt: 
    • Increased risk of bankruptcy.  Your cash flow might get a temporary boost from the loan, but be careful not to borrow too much money; otherwise, every cent your business generates will need to go towards debt payments, strangling the company’s cash flow.  If your business experiences any unfavorable surprises you might not be able to make the required debt payments, which could lead to bankruptcy.
    • Debt requires more financial discipline and cash management than equity because of the amortization schedule and loan covenants associated with debt.
    • Beware of vulture lenders.  The difference between 7% monthly interest and 7% annual interest is enormous.  7% monthly interest is equal to 84% annual interest.  No reputable lender speaks in terms of “monthly” interest rates.  Read the fine print and confirm that the interest rate being charged is the ANNUAL interest rate.  Avoid opportunistic vulture lenders at all costs.
  •   How to find the right bank for you:
    • plurafinancial.com (shameless plug) is a free online tool available to small business owners seeking to get matched with appropriate, reputable lenders to find the best possible rates.
    • Consult with your local Small Business Development Center.
    • Apply for a loan in person to 5-6 banks, including a few large national banks and a few small community banks.  Cast a wide net and don’t settle for the first offer that comes along!
“Part 2 – When To Raise Equity” coming soon!

Brandon Hinkle is the CEO of pluraFinancial.com.  Prior to plura, Brandon served in the workout group for GE Capital’s sponsor finance division (Antares), and was an underwriter in Merrill Lynch Capital’s corporate finance group. He started his career as an underwriter in Merrill’s small business lending division. Brandon has a BA from Michigan State and an MBA from Northwestern University. Contact Brandon directly at:bhinkle@plurafinancial.com.

Written by entrabanker

June 7, 2012 at 9:35 pm