Editorial and Commentary
Read about our daily thoughts and commentaries about financial topics.
Opportunity Zone Investment Funds
by SD Chang
June 2, 2021
The following is a brief description of how an Opportunity Zone fund works. If you have an interest in learning more about this Opportunity Zone fund, please contact us and we would be happy to further discuss this fund.
What is the goal of an Opportunity Zone Fund?
A Qualified Opportunity Zone Fund is designed to enable an investor who has capital gains from the sale of stocks, stock options, or real estate to both defer tax on their current capital gains, and potentially eliminate tax on future capital gains.
What is an Opportunity Zone?
An Opportunity Zone is a community nominated by the state and certified by the Treasury Department as qualifying for this program. There are approximately 8,700 Opportunity Zones nationwide.
How does this Program Work?
To defer a capital gain that an investor has, a taxpayer has 180 days from the date of the sale of the asset generating the capital gain to invest the realized capital gain dollars into a Qualified Opportunity Zone Fund. The fund then invests in Qualified Opportunity Zone Properties. The taxpayer may invest the return of principal as well as the recognized capital gain in the Opportunity Zone Fund, but only the portion of the investment attributable to the capital gain will be eligible for the exemption from tax on further appreciation of the Opportunity Zone Investment. Opportunity Zone funds allow gains from any appreciated asset, such as stocks, stock options, or real estate, to be invested into an Opportunity Zone Fund.
What is a Qualified Opportunity Zone Fund?
A Qualified Opportunity Zone Fund is an investment vehicle organized for the purpose of investing in qualified opportunity zone property.
What is a Qualified Opportunity Zone Property?
A Qualified Opportunity Zone Property is a property located within a Qualified Opportunity Zone. Such property needs to be substantially improved, with the improvement required to be at least the cost of the initial investment in the Opportunity Zone within 30 months of initial acquisition. For example, if an Opportunity Zone Fund acquires a property in an Opportunity Zone for $1 million, the fund has 30 months to invest an additional $1 million for improvements to the property to qualify for this program. In this example, if an empty plot of land was acquired for $1 million, then an additional $1 million must be used to construct a building on the property.
What are the tax deferral and savings?
A Qualified Opportunity Zone Fund provides potential tax savings in 3 ways:
1. Tax deferral through December 31, 2026. A taxpayer may elect to defer the tax on some or all of a capital gain if, during the 180 day period beginning on the date of sale, they invest in a qualified opportunity fund. Any taxable gain brought into the fund is not recognized until December 31, 2026 (due with the filing of the 2026 tax return in 2027) or until the investment in the fund is sold, whichever comes first.
2. Step up in the tax basis of 10% of deferred gains. A taxpayer who defers gains through a Qualified Opportunity Zone Fund by December 31, 2021 will receive a 10% step up in basis if held in the Qualified Opportunity Zone Fund for at least 5 years. This means that 10% of the capital gains invested in the fund will be tax free if held in the fund for 5 years.
3. No tax on appreciation. Remaining in the Qualified Opportunity Zone Fund for at least 10 years results in the cost basis of the property being equal to the fair market value on the date of the final sale of the Opportunity Zone investment. What this means is that any appreciation in the Opportunity Zone asset above the initial investment becomes completely tax free to the investor after 10 years, irregardless of the amount of the gain. For example, if an investor invests $200,000 in current capital gains in an Opportunity Zone Fund by December 31, 2021, and holds for at least 10 years resulting in an investment value of $500,000 at that time, then capital gains tax is on their initial $200,000 investment is reduced by 10% so that the investor pays capital gains tax on only $180,000 of their original investment (and this tax is deferred until 2026), and the additional gains of $300,000 would be completely tax free to the investor at the time of exit from the Opportunity Zone Fund.
Conclusion: If, as an investor, you have capital gains from sale of stock, stock options, or real estate and are looking to both defer paying tax on current gains and possibly eliminate tax on any future gains, a Qualified Opportunity Zone Fund may be an option to consider.
If an investment in our 3LA Ventures Qualified Opportunity Zone Fund is of interest to you, please contact us and we would be happy to facilitate a discussion.
How Effective are US Government Stimulus Checks
by R Chang
April 25, 2021
On March 13, 2020, President Trump officially declared the Covid-19 pandemic a national emergency in the United States. Subsequently, many states, including California, requested citizens remain at home to reduce the transmission of the Covid-19 virus. The economic impact of this lockdown on the US economy was significant, with a closure of numerous businesses, significant increase in unemployment, and a sharp reduction in consumer spending. As the pandemic grew quickly in scale and the shutdown was extended, US leaders in Washington DC deliberated on how best to respond to this sudden and significant economic contraction. A prolonged reduction in spending would force the US economy into a recession (or depression). The government decided to maintain low interest rates to sustain the economy, but the fiscal policy response was designed around providing stimulus checks to consumers to: 1) assist with reduction in household income because of job losses, and 2) to maintain consumer spending.
Several questions immediately arose regarding the use of providing funds to consumers. Which US citizens should receive this funding? How should the funding be transferred to consumers? What would be the best ways to ensure that the funding would be used by US citizens to stimulate the economy? If checks were provided to consumers, would they use these checks for something other than economic consumption?
The US Congress has, to date, passed three rounds of stimulus checks. The first round of $1,200 checks was authorized by the CARES Act on March 27, 2020 (Fedweek, 2020). A second round of $600 stimulus checks were included in the post-election legislation on December 27, 2020 (Hagen, 2020). A third round of stimulus checks, consisting of $1,400, was approved by President Biden on March 11, 2021 as part of the American Rescue Plan Act of 2021 (SmartAsset, 2021). In each of these cases, Congress determined which citizens received stimulus checks based on their adjusted gross income (AGI) on their tax filings. The full stimulus amounts were issued to individuals who filed tax returns with an AGI less than $75,000 and married individuals with a combined AGI of less than $150,000. While the use of AGI appears to be a reasonable metric, three issues arose. First, an AGI can only be calculated if a person actually files a tax return. A number of low income individuals, illegal immigrants, or unemployed with no income do not file tax returns in the first place. These individuals were therefore ineligible for stimulus payments even though these classes of individuals were among those most likely to benefit. The second issue worth discussing is that many wealthy individuals that have non-income producing assets can have a low AGI. For example, an unemployed individual with a large stock portfolio can have a low AGI if he does not sell any stock in a given year. Under the AGI criteria, this wealthy individual would be eligible to receive stimulus checks despite not suffering financial hardship. Third, there has been significant discussion that the thresholds to receive stimulus payments have been set too high, as married couples earning $150,000 per year are generally not suffering significant economic impact. Congress acknowledges that the stimulus payments need better targeting, but have not come up with an alternative solution (Bloomberg, 2021)
There has also been debate on how to transfer stimulus payments to US citizens. Some have received actual checks from the US government, either as a direct deposit if the government had bank account numbers on file from prior tax return filings, or as paper checks in other instances. However, due to a number of errors in the IRS database, some payments were made to inappropriate individuals. There have been examples of deceased individuals receiving stimulus checks while other eligible individuals in the same household did not receive any payments at all (Brewster, 2020). This has been a recurring problem in the past. During the 2009 financial crisis, the US government sent $250 stimulus checks to an estimated 72,000 deceased taxpayers (Brewster, 2020). In other situations, the US government sent stimulus payments to recipients in the form of a VISA debit card. However, these cards were often mailed without any detailed information, and some consumers ended up throwing their debit card away thinking it was a spam solicitation for a credit card application (CNBC, 2020).
Another question arose around what US consumers were doing with their stimulus checks. While some consumers did spend their checks in the economy as intended, a number of others put their stimulus payments into savings and did not actually spend the money for consumer goods. A recent study predicted that for the third round of stimulus payments, nearly three-fourths of the checks would be put in savings rather than spent (Bloomberg, 2021). Several financial publications even provided consumers with suggested options for using their stimulus payments, including investing in college savings plans, paying off high interest debt, or saving for retirement (Block, 2020). While building savings is a good financial objective for individuals, the intent of the stimulus payments were to stimulate the economy through consumption. In more extreme instances, stimulus payments were placed into the US stock market or used to purchase cryptocurrency, fueling the rise in these markets without any increase in consumption (Lambert, 2021). The fact that many of the checks went into savings instead of food and rent may imply that the recipients were not the appropriate ones.
Despite the above issues, there is baseline factual evidence that at least some portion of the stimulus payments made it into economic spending. A recent study by Bank of America noted that those consumers who received stimulus payments spent 49% more than they did during the same week two years ago, while those who did not receive stimulus payments spent only 9.7% over the same comparison period (Hansen, 2021). This study noted that most of the gains in spending came from low-income consumers earning less than $50,000 per year, which would be the primary target group for these stimulus payments in the first place. However, the consumption might not be what the government had in mind, as the top three consumer categories showing the greatest increase in spending were furniture, online electronics, and clothing (Hansen, 2021).
Works Cited
Lambert, Lance. “Will Stimulus Checks Take Bitcoin Even Higher? One Analyst Thinks So.” Fortune. Fortune, March 17, 2021. https://fortune.com/2021/03/17/stimulus-check-bitcoin-price-predictions-3rd-round-irs-stimulus-checks-direct-deposit-payments-update/.
Hansen, Sarah. “$1,400 Stimulus Checks Are Already Working As Credit, Debit Spending Surges 45%, BofA Says.” Forbes, March 25, 2021. https://www.forbes.com/sites/sarahhansen/2021/03/25/1400-stimulus-checks-are-already-working-as-credit-debit-spending-surges-45-bofa-says/?sh=613426087e64.
Dmitrieva, Katia, Laura Davison, Saleha Mohsin, and Erik Wasson. “Top Democrats Seek to Narrow Check Eligibility: Stimulus Update.” Bloomberg, February 3, 2021. https://www.bloomberg.com/news/articles/2021-02-03/americans-may-largely-save-their-aid-checks-stimulus-update.
Wasson, Erik, Billy House, Julia Fanzeres, Mario Parker, and David Westin. “Democratic Staff Prep Two Options for Package: Stimulus Update.” Bloomberg, January 27, 2021. https://www.bloomberg.com/news/articles/2021-01-27/house-leader-resets-schedule-to-speed-aid-bill-stimulus-update.
Brewster, Jack. “Her Deceased Boyfriend Received A Stimulus Check. She’s Still Waiting For Hers.” Forbes, May 1, 2020. https://www.forbes.com/sites/jackbrewster/2020/05/01/her-deceased-boyfriend-received-a-stimulus-check-shes-still-waiting-for-hers/?sh=70e26c7d6935.
Block, Sandra. Kiplinger, March 19, 2021. https://www.kiplinger.com/personal-finance/602390/money-smart-ways-to-spend-a-third-stimulus-check.
Hagen, Lisa. “Stimulus Checks Hotly Debated as Congress Considers Coronavirus Relief.” USNews, December 10, 2020. https://www.usnews.com/news/politics/articles/2020-12-10/stimulus-checks-hotly-debated-as-congress-considers-coronavirus-relief.
“House Coronavirus Relief Bill Would Boost Federal Employee Benefits.” FEDweek, March 24, 2020. https://www.fedweek.com/fedweek/house-coronavirus-relief-bill-would-boost-federal-employee-benefits/.
Geier, Ben. “American Rescue Plan: Inside Biden's $1.9 Trillion Stimulus.” SmartAsset. SmartAsset, March 11, 2021. https://smartasset.com/financial-advisor/american-rescue-plan-biden-third-stimulus.
Adamczyk, Alicia. “People Are Throwing Away Their Stimulus Debit Cards by Accident—Here’s How to Replace Yours for Free.” CNBC, June 5, 2020. https://www.cnbc.com/2020/06/05/how-to-replace-your-stimulus-debit-card-if-you-threw-it-away.html.
Education Planning, Part 2
by S Chang
April 17, 2021
Tax-Advantaged Plans for Education Savings
These are a series of options that allow for savings of college education in a tax-advantaged process, typically with tax free growth of the asset within the plan.
Prepaid tuition plans
These plans involve paying for future tuition at today’s tuition rate – you are locking in the future tuition at the present cost
Prepaid tuition plans are considered an asset of the parent for financial aid purposes
The primary disadvantage is that your “rate of investment return” is essentially equal to the rate of tuition inflation
Other disadvantages are that the child may receive a scholarship and not need the prepaid tuition, and should the parent choose to return the prepaid tuition, only the principal is returned without any interest
Prepaid tuition plans are designed to pay only the tuition, not room and board
529 Savings Plan
These plans are considered an asset of the parent for financial aid purposes
Any appreciation of the asset value is tax free if used for qualified education expenses
Lump sum contributions can be recognized as being prorated over a 5-year period (so an individual can contribute $75,000 (5 x $15,000) in one year and still avoid the gift tax consequences
Advantages: the account owner controls the asset (not the child), beneficiaries can be changed at any time, and the contributor effectively removes the asset from their gross estate (while still maintaining control of the asset)
Disadvantages: there is a 10% penalty on earnings (not contributions) if the funds are not used for qualified education expenses (exceptions to this 10% penalty include death, disability, or receipt of scholarship for the beneficiary)
Qualified education expenses include tuition, books and supplies, and room and board
Beginning in 2018, up to $10,000 per year can be used to pay for tuition from a child’s enrollment at an elementary, middle, or high school.
Beginning in 2020, up to $10,000 per year can be withdrawn to pay for student loans
529A ABLE Accounts
Similar to 529 plans but for individuals with disabilities
Typically set up through State programs – funds from 529 plans generally can be rolled into ABLE accounts
Contributions can be made by anyone, but cannot exceed $15,000 per year in total
Coverdell Education Savings Accounts
Considered an asset of the parent from a financial aid standpoint
Contributions are limited to $2,000 per year, per beneficiary (there is a phase our based on AGI for higher income individuals)
Contributions grow tax deferred, and then if used for a qualified education expense, the earnings are tax free
The account owner can change the beneficiary at any time
Funds in a Coverdell account must be used by age 30 of the beneficiary
There is a 10% penalty on the earnings if not used for qualified education expenses (tuition, books and supplies, and room and board)
Uniform Gift to Minors Act/Uniform Transfer to Minors Act (UGMA/UTMA)
Assets are considered assets of the child from a financial aid standpoint
Taxation of unearned income may be subject to the kiddie tax
The primary risk is that the child, once considered a legal adult, can use the assets for something other than education
An UGMA can only include: stocks, bonds, and mutual funds
An UTMA can include: real estate plus stocks, bonds and mutual funds
Educational Planning, Part 1
by S Chang
April 16, 2021
Education planning is a significant part of financial planning for most families. In part 1 of our educational planning coverage, we will discuss the main types of financial aid loans available for students. In part 2 of our educational planning coverage, we will discuss 529 plans, Coverdell Education Savings Accounts, and Uniform Gift to Minor’s Act/Uniform Transfer to Minors Act (UGMA/UTMA).
The amount of financial aid that a student qualifies for is based on a formula developed by Congress that is used to determine how much a particular family can contribute to a student’s educational cost. This amount is called the Expected Family Contribution (EFC). The financial need is defined as the total cost of the tuition and education expense minus the EFC. The financial need is a dollar amount that can vary from one school to another based on the tuition/cost of attendance.
The most common types of financial aid programs are:
Pell Grants
Based on the EFC and strictly need based
Only students who have not earned a bachelors or professional degree qualify
Stafford Loans
Provided by the US Department of Education
Repayment of the loan begins 6 months after completing school (or falling below part time status)
There are two types of Stafford Loans: subsidized and unsubsidized
Subsidized loans involve the interest being paid by the federal government while the student is in school
Subsidized loans are need based
Unsubsidized loans involve interest being accrued at the time of loan disbursement without any payment by the federal government
Unsubsidized loans are not need based
Parent Loans for Undergraduate Students (PLUS)
PLUS loans are not need based
Generally a loan for parents to pay for their children’s undergraduate education (ideal for parents who can afford to make the loan payments, but have not saved enough funds for their children’s college education)
PLUS loans are not subsidized
Grad PLUS loans for Graduate Students
For graduate or professional students
The students credit score is used in part to determine loan qualifications
Loan repayment begins 6 months after graduation
Interest either accrues to the balance, or one can pay it monthly prior to the start of the repayment period.
Federal Perkins Loans
Perkins loans were for students with exceptionally low EFC
Perkins loans were need based
Not offered any more after September 2017
Differences between Tenancy in Common vs Joint Tenancy with Rights of Survivorship
by S Chang
March 23, 2021
Among the various types of forms of property interests held by two or more people, an important set of distinctions exist between Tenancy in Common and Joint Tenancy with Rights of Survivorship, two of the most common choices when two or more individuals are taking title to property.
Tenancy in Common (TIC) is a form of property interest between two or more individuals. Ownership interests do not need to be acquired at the same time. Owners can choose to partition or sell their interest without the consent of the other owners of the TIC. Each person holds and undivided (meaning they can, in the case of a home, use the entire home), but not necessarily equal, interest in the property. At the time of the owner's passing, the interest in the TIC property passes through probate to the heirs of the decedent, NOT to the other owners of the property. So probate is necessary to pass ownership. Finally, each tenant in a TIC will generally have an interest proportional to his financial contribution, but these interest do not need to be equal. For example, if Mary and John purchase a house under TIC, and then John passes away, his share of the ownership of the house will go to whomever his designated heirs are under his probate. Mary will not own more than her original ownership percentage after John's death (unless John has designated Mary as his heir to his ownership percentage as part of John's will).
In a Joint Tenancy with Rights of Survivorship (JTWROS), the interest in the property is also held by two or more people. Each individual owns an undivided, but equal interest in the whole property. The establishment of ownership among the individuals must be established at the same time under a JTWROS. At the death of one joint tenant, his interest automatically passes to the surviving property owners outside of the decedent's probate. This transmission of ownership occurs under the Order of Law, and probate is not required to pass on ownership. For example, if Bob (who is married to Maria) and Susan purchase a home under JTWROS, and Bob passes away, his ownership stake in the home passes to Susan outside of Bob's probate even if Bob's will "leaves everything to Maria."
Note that the above is not considered tax advice. Please consult your tax specialist for your indivudal situation.
Systematic and Unsystematic Risk in Investment Portfolios
By S Chang
March 14, 2021
It is important for investors to understand the difference between Systematic Risk and Unsystematic Risk in their investment portfolios. Additionally, it is important to understand the factors or components that make up each of these risk categories. Systematic risk is the lowest level or risk that can be achieved in a diversified portfolio. Systematic risk cannot be diversified away as it is inherent in the financial system. In contrast, Unsystematic risk is the risk that exists in a single investment. Unsystematic risk can be diversified away through increasing the number and diversity of investments in a portfolio.
Systematic Risks include the following:
Inflation or Purchasing Power Risk: This is the risk that inflation makes a dollar worth less in the future than at the present. Inflation risk affects all forms of investment, and reduces the returns of all forms of investment
Reinvestment Risk: This is the risk that an investor will not be able to take his returns from a prior investment and be able to reinvest these returns at the same rate as the prior investment. For example, if an investor has a bond reach maturity that pays 8% but all current bonds in the market are paying 5%, the investor will not be able to find a new bond that currently pays the same interest rate as the prior bond.
Interest Rate Risk: This is the risk that changes in interest rates may impact the value of investments.
Market Risk: This is the risk that short term changes in market direction tend to impact the majority of all securities, taking them in the same direction as the market.
Exchange Rate Risk: This is the risk that changes in exchange rates will impact the price of international investments.
Unsystematic Risks include the following:
Accounting Risk: This is the risk that can occur if an accounting firm has too close of a relationship with the management of a company. Worldcom and Enron are examples of accounting risk.
Business Risk: This is the risk that a company ends up in an industry that has fallen out of favor or is on the wrong side of market trends. Tobacco companies represent an example of this type or risk.
Country Risk: The risk that investments in a particular country may be impacted by specific events related to that country. Devaluation of currency in Argentina can impact investments in Argentina, and is an example of Country Risk.
Default Risk: The risk of a company defaulting on the debt payments.
Executive Risk: The risk associated with the moral and ethical behavior of corporate leadership.
Financial Risk: Generally related to the amount of borrowing or leverage by a company. Significant borrowing by a company make an investment more risky.
Government Risk: This is the risk related to government regulations that can negatively impact a company. For example, the US government can increase regulations on a particular industry that can affect profit margins.
It is important to remember that through portfolio diversification, an investor can diversify away Unsystematic Risk. This can be accomplished through broad ownership of different asset classes as well as with the use of a number of investments within each asset class. Ideally, an investor should be able to eliminate most Unsystematic Risk in their portfolio, leaving only Systematic Risk.
Advantages of Family Holding Companies
by S Chang
March 12, 2021
A Family Holding Company is a estate planning strategy that can be useful to transfer assets to heirs without utilizing the Lifetime Gift Exclusion, currently at $11,580,000 per individual. The Family Holding Company consists of General Partners and Limited Partners. Typically the General Partners are the parents, and the Limited Partners are the next generations of children and/or grandchildren. The Family Holding Company involves the transfer of assets from the General Partners to the Holding Company. These assets can be real estate, stocks, or businesses. The Family Holding Company becomes the new owner of the assets and stock in the Holding Company is issued to the General Partners (since they provided the assets).
Each year, the General Partners distribute stock in the Holding Company to the Limited Partners up to the Annual Gift Exclusion limit, currently $15,000. If there are two General Partners, $30,000 in stock value can be distributed to each Limited Partner each year. In this fashion, ownership of the assets in the Holding Company are gradually transferred from the General Partners to the Limited Partners utilizing the Annual Gift Exclusion each year. The Lifetime Gift Exclusion of the General Partners is thus preserved for transfer of other assets outside of the Family Holding Company.
This structure has several advantages for the General Partner. First, as long as the General Partners maintains at least some ownership, even 1%, they have full control over the asset even if the limited partners have the remaining 99%. Secondly, as stock in the Holding Company is transferred out of the hands of the General Partner to the Limited Partner, any increase in the value of the stock of the Holding Company, as a result of the increase in the value of the underlying assets is transferred to the Limited Partners and thus the growth in the asset is no longer in the estate of the General Partners. Third, the General Partners can choose to withhold distribution of additional stock to the Limited Partners if desired, and this provides protection from creditors and divorced spouses. Any distribution of cash or dividends to the stockholders can be retained within the corporation and the stockholders, in this case the Limited Partners, would still be required to pay taxes on these non-distributed dividends. This makes the stock undesirable to creditors, who would owe taxes if they were to attempt to seize the stock but without the cash flow to pay these taxes.
Over time, a significant amount of assets can be transferred from the General Partners to the Limited Partners through a Family Holding Company.
The Four Basic Ways Real Estate Can Increase Your Wealth
by S Chang
March 8, 2021
Real estate is a common mechanism whereby investors can build wealth. Compared to other investments, real estate has the added advantage of favorable tax deductions as well as allowing the use of leverage. However, when calculating total returns on real estate investments, it is important to consider all the ways that real estate can increase your bottom line. The following are the four broad categories that real investors should consider when determining total return.
First, investment real estate generates cash flow from rental income. Net operating income (NOI) is that income that remains after all expenses are accounted for, and subtracting any loan payments from NOI yields the cash flow left to the investor. Mortgage expense is not included in the NOI since loan payments are not considered operating expenses. Ideally, this cash flow is positive, and when divided by the cash (basis) invested in the real estate, yields the cash on cash return.
Second, real estate has favorable tax deductions that are allowed. For example, depreciation and interest expenses can be deducted against passive income to reduce your taxes, and in some instances depending on your Adjusted Gross Income (AGI), can be used up to $25,000 per year to reduce other income. Essentially, these real estate deductions will potentially reduce your taxes due, which in turn increases your net worth.
Third, if an investor has a loan on the property, a portion of the mortgage payment each month is used to pay down the principal on the loan. Over time, this will increase the percentage of the value of the property that is investor equity, and reduce the percentage of the value of the property that is the loan.
Finally, the overall value of the real estate property can increase over time. This will further increase the equity that the investor holds, which represents an increase in both the investor net worth as well as the overall valuation of the asset.
When determining the favorability of a real estate investment, and investor should consider all four of the above factors when calculating the return on the investment. Some factors may not always be positive, such as a negative cash flow if there is no renter in place or a decrease in equity if the value of the asset should decline. However, for the astute investor, one can typically find select real estate investments that show solid increases in the investor return when incorporating the four categories described above.
How a Self-Directed IRA can help you diversify
by S Chang
March 6, 2021
A Self-Directed IRA is a Individual Retirement Account that allows you to diversify beyond the standard investments typically allowed in an IRA. A Self-Directed IRA can be either a traditional IRA with either pre-tax or post-tax contributions, or it can be a Roth IRA. Standard investments allowed in an IRA or Roth IRA managed by a typical custodian include stocks, bonds, mutual funds, and select gold and silver coins. These standard IRAs do not allow investments into alternative assets such as private companies, VC funds, or real estate.
Self-Directed IRAs can increase the investment options for an individual investor by giving you increased control over your investment and retirement savings. A Self-Directed IRA is set up with a custodian that allows such IRA accounts to have the ability to invest in real estate, VC funds, private start up companies, limited partnerships, LLCs, and even mortgage notes.
3LA Ventures allows participation in our funds through Self-Directed IRAs. Please contact us for more information about Self-Directed IRA custodians or how an investor can participate in our funds through their Self-Directed IRA.
What is Section 1202?
by S Chang
March 5, 2021
Section 1202, also called the Small Business Stock Gains Exclusion, is a section of the Internal Revenue Code (IRC) that provides a possible tax savings measure for investors in qualified Small Business Stock companies. A qualified Small Business Stock is typically any stock in a C corporation which is originally issued after the date of the enactment of the Revenue Reconciliation Act of 1993. Under Section 1202, the IRC allows capital gains from select small business stock to be excluded from federal tax. Investment in the stock of such companies needs to be made after September 27, 2010, and the stock needs to be held for at least five years. Once these two qualifications are met, if the investor subsequently sells the stock, it will be exempt from federal capital gains tax. The amount of gain excluded under Section 1202 is limited to a maximum of $10 million or 10 times the adjusted basis of the stock.
The purpose of this Internal Revenue Code was to provide an incentive for non-corporate taxpayers to invest in small businesses. Many investments in private companies by individuals or other entities may qualify for this significant tax break.
Biden Tax Policies to Impact GDP?
by R Chang
January 15, 2021
A fundamental platform of Joe Biden’s presidential campaign is the proposal of higher tax rates. Biden has discussed the implementation of higher marginal personal income tax brackets, higher social security tax (introduction of social security taxes for those earnings above $400,000 per year whereas in 2020 social security is applied only to the first $137,700 in income), and a near doubling of the capital gains tax from 23 to 43% (Watson, Garrett, Huaqun Li, and Taylor LaJoie. “Details and Analysis of Biden's Tax Plan.” Tax Foundation, December 10, 2020). All of these items would create a negative wealth effect on the consumer. Furthermore, Biden is proposing to increase the corporate tax rate from the current 21% to a new rate of 28%, representing a 33% increase (Tax Foundation, 2020). This will translate to higher expenses for corporations.
The standard economic formula for Gross Domestic Product (GDP) is defined as GDP = C + I + G + NX, where C is consumer consumption, I is business investment, G is government spending, and NX is net exports. Based on the above-proposed tax changes, macroeconomic principles would expect a decrease in C (due to reduced consumption from the decreasing wealth effect) and a reduction in I (due to decreased corporate investment resulting from higher corporate taxes). The result of both of these changes would be an expected drop in GDP. This reduction has been estimated by the Tax Foundation General Equilibrium Model to be a -1.62% reduction in GDP (Tax Foundation, 2020). Given that the average year over year change in GDP over the last ten years ranged from +1.55% to +3.18% (Trends, Macro. “U.S. GDP Growth Rate 1961-2020.” MacroTrends, 2020), this decrease in GDP from Biden’s proposed tax plans are significant.
Transparency in Coverage Rule
July 1, 2022
Under the Transparency in Coverage Rule, issued in 2020 by the US Departments of Health and Human Services, Labor, and the Treasury, health plans and health insurers must publish two separate machine readable files (MRFs). This link leads to the machine-readable files that are made available in response to the federal Transparency in Coverage Rule and include negotiated service rates and out-of-network allowed amounts between health plans and health care providers. The machine-readable files are formatted to allow researchers, regulators and application developers to more easily access and analyze data: https://www.anthem.com/machine-readable-file/search