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Qualified Small Business Stock Loophole

August 30, 2016

Gains on investments in Qualified Small Business Stock (QSBS) may be tax free if they meet the requirements of IRC Section 1202. Following are the major requirements:

  1. The stock must be owned in a domestic C corporation. S corporations and LLCs are not applicable for this benefit
  2. The maximum amount of assets at the time the stock was issued (and immediately afterwards) cannot exceed $50 million. Note that this refers to assets, not capital. For example if the corporation has $60 million in assets and $58 million in liabilities with a $2 million capital, it will not qualify
  3. The stock must be acquired at its original issue, either directly from the corporation or through an underwriter
  4. During the period of stock ownership at least 80% of the value of the corporation’s assets must be employed in the active conduct of a qualified business or businesses.  Qualified businesses include those engaged in manufacturing, distribution and technology development. They do not include companies engaged in professional services, banking, brokerage or insurance activities, farming, a hotel, motel or restaurant
  5. The stock when disposed of must have been held at least five years
  6. The maximum gain in any one investment cannot exceed the greater of $10 million or 10 times the investor’s original basis
  7. Stock acquired after September 28, 2010 is 100% excluded. Stock acquired before then will have a limited exclusion
  8. The gain excluded from taxation is not subject to the 3.8% net investment income tax (NIIT)
  9. The 100% excluded portion is not an Alternative Minimum Tax (AMT) preference item but for stock acquired on or before September 28, 2010, 7% of the excluded gains are an AMT preference item
  10. The capital gains tax on income that is not excluded is 28% regardless of the taxpayer’s regular capital gains rate, plus the 3.8% NIIT if applicable
  11. To the extent there is an acquisition of the corporation and stock in the acquiring corporation is distributed, or if there is a Section 1045 transaction, the exclusion may still be able to be claimed – but check first with your tax advisor, as you should check everything beforehand with your advisor
  12. These rules apply to federal taxation and not state treatment. Each state has their separate rules that need to be examined

To make sure there will be no problem in claiming the exclusion, you should be able to fully document your purchases and the corporation’s qualification.

These rules seem complicated and they are, but they present a great opportunity if you start or invest in a company that qualifies. If there is a large gain on a future disposal of the corporate stock, it will be well worth the effort. To assure you receive the benefit you should have every one of these rules vetted beforehand by a knowledgeable tax advisor.

Assistance for this blog was provided by Brian Lovett, CPA, partner at WithumSmith+Brown, PC.

Differences between Marketing and Selling

August 25, 2016

Selling is a process where the goal is an order. Marketing involves the totality of presenting the company to customers and prospects so they want to do business with you.

Sales people need immediate gratification. Marketers take a long-term view. Both are necessary for successful growth.

Selling involves direct responses from the customer; follow up; and helping the customer identify their needs and then showing them how you can fill it. Good selling is done without price being a major factor, but it has to be discussed and presented properly. Selling also requires availability, attractive and serviceable packaging, prompt timing and delivery, and post-sale support.

Marketing is a program presenting your firm in a way that makes people want to do business with you. It should make you approachable and seem competent to fill their needs and solve their problems. Marketing is the way you dress, respond, follow-up, individual and firm brands, evident culture and everything about you. Your image is established by your letterhead and style of your letters and reports; the memos you write and the way you speak; and even how your phone is answered. Newsletters, blogs, social media, press releases and publicity affect and mold your image and many times establish your image.

Client contacts are very important – perhaps the most important part of marketing. I know of a firm that requires partners to have a client contact at least once every two months, and the managing partner monitors it. A client contact can be a telephone call just to say hello, sending a newspaper or magazine clipping, or a book, or having lunch or just dropping in when you are in the “neighborhood.” These are all quite easy if they are made part of your routine. I do not consider emails a client contact.

Besides marketing to get new business, you also need to market to get additional business or sell additional services to existing customers or clients. Effective marketing should nurture referrals. If you do not get adequate referrals from existing customers you are doing something wrong, and you need to work on this. One way I find effective is to direct marketing activities to them. Consider your customers as your sales force and you the sales manager. The job of the sales manager is to provide the sales force with the ammunition to sell and the reasons why your company is the best. Work on it!

Effective marketing establishes a community – a sense of belonging – an investment by the prospect. It also includes training your team members with procedures for them to follow.

Selling has to be done subtly, but directly. And with the recognition that you are providing a service to customers by “selling” them something they not only need, and in some cases, must have.

There are great differences between selling and marketing and they need to be recognized, honed, integrated and developed.

Questions to Ask Your Financial Advisor

August 23, 2016

Many that have a financial advisor or investment manager get periodic updates and reasonably unlimited phone calls. However, I notice that many do not. Here are some questions to consider asking to determine how your money is being handled. If you know the answers to all of these questions, then good for you – it seems you are in good hands. Otherwise, ask these questions.

  1. How often should I expect communications from you regarding my portfolio, its performance, and strategy or any changes in strategy?
  2. Why don’t you ever call me when there is a major drop in the stock market?
  3. How does the present portfolio match up with the original plan or instructions that were discussed when you started managing my investments?
  4. Why has there been no co-ordination by you or attempt to find out about my other investment portfolios?
  5. What arrangements do I need to make with you now for my spouse if I die unexpectedly or become disabled?
  6. Why should I recommend you and to whom?
  7. Who decides what to buy in my portfolio, e.g. foreign vs. domestic or large and small cap, and how does the decision process work?
  8. What is your fixed income strategy – the yield appears very low after deducting your fees?
  9. It seems the fees I am charged are different than what we agreed to – can you explain your charges?
  10. Why is there always a balance in my cash account and how come some of the purchases in my account are for very low amounts, and how often do you make purchases?

It’s your money; it might be your future financial security and missteps might alter the plans you made for the rest of your life. Be a little involved. Ask these and any other questions that are on your mind.

When you get the responses, evaluate them to determine if this advisor is still the right person for you.

State Sponsored Lotteries

August 18, 2016

There are many state sponsored lotteries promising humongous dollars of prizes, yet when a winner is announced the fixed payout amount is much less.

The wining prize payout is announced as the aggregate of the thirty annual payments. However, the winner is provided with the choice to receive a lump sum payment, which is lower and what is usually chosen.

The reason for the lower cash payout is that the thirty years of payments include interest that will earned by the Lottery Commission retaining the funds until making the annual payments. The total of these 30 years of payments is what is advertised – not the lump sum that is claimed. People take the lump sum for various reasons such as anticipating a greater investment return, or being able to spend what they want now, or to just hold on to the money and know they have it.

The state is using a financial technique called discounting and employs principles of compounding. Here is the general rule:

  • Money you will receive in the future is worth less today.

Here is how this works:

  • Assume someone will pay you $1,000.00 in five years.
  • Would you rather have $784.00 today or wait five years to get your money?
  • Assuming there is no default risk, the $784.00 was calculated using an interest rate of 5.0%.
  • Therefore if you think you can earn more than 5.0% you should take the $784.00 today. If you think you cannot earn at least 5.0% you should wait.
  • If you don’t care how much you can earn because you want to spend the money now, take the $784.00.
  • If you don’t care how much you can earn because you will feel better having the $784.00 in your account, take the money.

The Lotteries work the same way. In a recent Powerball the interest rate used was 2.843%. Assuming the payout was $1 billion to one person. A lump sum (pretax) payment would be $620 million which is a 38% discount. The first payment would be $15,067,000 and would increase 5% each year until the final payment grows to $61,000,000. I always thought that the payments were equal amounts – not so.

Next is that if you take the annual payout and die your heirs will receive the balance of the payments, BUT your estate would be liable for Federal and possibly State [depending upon where you live] estate taxes, and would most probably not have the money to pay the taxes. The estate might be able to borrow against the future payments or get a lump sum settlement at that time [depending upon what your state’s rules are]. Either way this is a complication. An alternative is to buy a fixed premium declining term life insurance policy to cover the estate taxes, but then this would further reduce your investment proceeds.

If you take the lump sum it is advisable to hire an investment manager, understanding that those fees will reduce your cash flow. Also, taxes will be due on the lump sum now. If you take the annual payments and the tax rates go up, you will receive much less than at today’s tax rates. Bottom line: It ain’t simple, but I am sure you wouldn’t mind having these problems.

Getting back to the 2.843% rate, this might sound like a low rate, but there are very little alternative guaranteed rates today. The 30 year Treasury rate at that time was 2.79% [it is lower today], but the rates for each of the years up to 30 years are lower than that. Here, the Lottery Commission is offering a fixed 2.843% for the entire period. This is reasonable. By the way, if the rate they offered was greater, the lump sum payout would be lower. In the $1,000.00 example if the rate was 7.5% instead of 5.0% the lump sum today would be $697.00 instead of $784.00.

There are other issues for those fortunate enough to win the lottery, but I wanted to discuss the compounding and present value financial features and the estate tax complications.

Babe Ruth’s Pitching Statistics

August 16, 2016

There is no argument that Babe Ruth was one of the greatest baseball players, particularly for his home runs and batting average. However, not as well-known was his pitching statistics and I will share some of them with you here. His game appearances are too low for him to be included in the Top Pitchers listings.

Babe Ruth

Note that the Babe had very high win/loss and complete game percentages and an extremely low earned run average (ERA). There are many other great pitchers but I chose to compare the top legendary New York pitchers that we seem to always talk about at lunch.

Embracing Change

August 11, 2016

“Embracing Change” has become a buzz word by people that want to show they are innovative, imaginative and creative. I think otherwise.

The people that make meaningful changes do it, have clear trails of the benefits and value they created and have open minds that listen to problems and find needs and suggestions of solving them. They do not have the time to talk about embracing change because they spend their time developing and implementing changes and keep at it through many failures until they reach the success they are seeking and then look for more.

I know this because I have worked with people that are creating changes every day and who must make changes to compete effectively and succeed. These are our entrepreneurs and business leaders. Very few come from our political leaders where many of their best ideas die in committees or they are afraid to proceed or act on their own because of the threat of failure or of offending someone and the high likelihood of criticism from the do-nothings.

I do not want to waste this space offering examples when all you need to do is look how you spend your time and do things and compare it to how it was just ten and certainly twenty years ago. It is businesses that sprouted forth the changes we enjoy today and will continue to enjoy. Not government!

In this presidential election season we will hear about the many changes the candidates say they will make, particularly in their first 100 days that gets me to wonder about their veracity and even more so about their character in that do they really believe what they are saying.

There are many different types of changes: Social, Cultural, Economic, Environmental, Business model, Process and Procedural, Taxes, Spending, Habitual and Personal. Some can be made easily and without affecting or impacting anyone else such as how we personally feel about people of certain ethnicity or sexual persuasion; or a resolve to lose weight by eating healthier foods. However, some changes cannot be made without impacting directly on something else. These are the changes our candidates are talking about making. For instance, an increase in minimum wages will impact the costs of those paying these wages and could cause a reduction in work force, an elimination of a high labor intensive product lines or an increase in prices which would raise consumer costs or cause a reduction in units sold. It would also increase the spending by those with the raises and certainly improve their standard of living and remove some of the daily pressures they always face – so these changes are complicated not devoid of numerous effects. Another example is a decrease in taxes for some people that will either have to cause an increase for others, a decrease in government spending or spur a growth of such great proportion that net government revenues will not decrease. Likewise economic growth will cause an increase in inflation, an interest rate rise that will raise costs of money that increase governmental interest costs but also increase cash flow to retirees living on interest payments which will also increase their spending in an inflationary economy perhaps leaving them worse off than before their cash flow increased.

I do not have the answers and certainly not even all of the questions, but what I would like to know is that those making the claims and promises do and that they show them to back up what they promise. I want to trust that they thought it through, worked it out with economic and financial models that considered all the alternatives, interactions and causes and effects, and really know what they are talking about and promising. If I could be assured of this, I will believe them. Until then these are empty promises with a high likelihood that they will not be kept. If that is so, what does this mean about the veracity of what they are saying?

Likewise those bragging about embracing change are not the category of people that make the changes that benefit us.

“It’s not the life I chose.”

August 9, 2016

That quote was from Mikey Nichols, who became a quadriplegic after shattering his C5 vertebrae in a Monroe High School ice hockey game. My son Andy Mendlowitz wrote an article about a charity golf outing to raise money for the Nichols Family Trust and the Christopher & Dana Reeve Foundation for the Home News Tribune’s August 6, 2016 edition.

That quote mimicked what I wrote in response to comments about an article I wrote about children that are “forced” to work in the family business who feel “it’s not the life I chose.” Here I was dealing with regrets of rich people making big bucks but not happy with their life while Andy was dealing with someone that truly had no choice about what happened but who was upbeat and optimistic. Life stinks sometimes but many times it seems the difference between happiness and regret is the mental attitude and trying to make the best of the situation versus being down on everything you do because something is not going right. Andy’s article put things in the right perspective for me.

Many of us tend to look at the glass being half empty and feeling bad instead of seeing it half full and being happy about it. There are many things in life that we cannot control. It is how we deal with the unpleasantness that shapes our character and whether we are someone that people will enjoy spending time with. I know many downers and of course many really happy people. Give me the happy people anytime. I also try to avoid the downers as much as possible.

I have a fixed budget of time – I just do not know when it would run out. So, I have gotten stingy how I care to spend it. I want to continue accomplishing things and being with people that encourage this and who also make me feel good and who do not complain about really picayune things and who exude positive outlooks. I do not like to listen to ranting about others and small talk that draws out negatives about things we cannot control or that might never happen.

I was touched by Andy’s article about Mike Nichols and upset at myself for getting caught up in the travails of my rich clients’ sons and daughters that have not taken control of their lives but rather, chose the comfort of working for Mommy and Daddy and then feel they have been short changed by life. They chose their path. Mikey Nichols did not.

My article and comments are at .
Andy’s article is at .

Mike’s full quote is “It’s not the life I chose, but it’s the one that I was given, and I’m making it work. I understand the importance of also spreading the word on spinal cord injury.” If you care you can make contributions at


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