Month: February 2022

Preface: You need to change your mind from sell sell sell to help help help and if you can do that as a business you will win [in social media] — Mark Schaefer

If Inflation Conditions Where Will Your Business Be? (Segment V)

Since the benchmark for inflationary business conditions for the majority of entrepreneurs only rewinds to the early 1970s, for a moment, let us access some earlier footage on inflationary eras. The nation of Germany portrays clear historical case studies of subsurface inflation and hyperinflation during and after two significant military escapades in just the last century.

Additionally, in earlier times, The French political philosopher Jean Bodin credited inflationary effects to nothing less than a growing volume of currency as early as the 1560s. On the other hand, the populace, thought it was a result of the avaricious capitalistic greed and uncurbed appetites for manufactured goods. Today, those with a Ph.D. in finance rightly appraise inflation as a known mechanism that, like clockwork, carefully and legally redistributes the wealth [of an economy], ultimately rewarding those with the most significant access to credit trends.

Further, according to Charlie Munger of  Berkshire Hathaway fame, inflation is a solemn social subject, not solely financial. Reflect on this outlook for a moment. In his opinion, inflation is the traditional avenue to the failure of democracies. For instance, when democracies failed in South America, inflation had a big part of doing with it.

The book Mennonites and Economics on page 350 tell the history of the time of flourishing for the Russian Mennonites. Growing from a desperately poor immigrant group of 8,000 to a generally prosperous group of 45,000 with class structure, some Mennonite farms and estates became big business. Before was, inflation and social change erupted, three percent of the Russian Mennonite Capitalists owned 30% of total Mennonite land and employed 22% of the Mennonite population. The author then outlines that free-working like-kind people in business have historically flourished with an intimate tie to economic factors of free-market expansions. Again, this is a pillar to the fact that  currency inflation is not simply a monetary phenomenon – it quietly conditions community after community.

While the future economic solutions will perhaps not conform to historic financial solutions, appreciating what history teaches about inflationary eras as they age will help us plan for a future where business communities will need to adapt to increasing change – socially and economically. The chronicles of monetary inflation paint a clear picture of expectations with shifts in types and shadows of resultant social trends.

Therefore, the expectation is highly probable that the inflation arising from the Pandemic since 2020 will result in new hues to the social fabric of business communities and, more broadly, the globe. Can you reset tables after a banquet begins?  Will these new social hues will be increasingly evident in government administration and economic policy changes with time? If that is true, entrepreneurs managing enterprises amidst the present and future modifications with the inflationary trend likely should reflect on whether to seek great things or not, if concerned about bearing the yoke.

Why be anxious? What are you looking for? Where there is a will there is way. If knowledge saved the Egyptians during the time of Joseph, there is still reason for your optimism. And so, if inflation conditions, where will your business be? One answer is – right where our God planned it to be.

Preface: Poor is the pupil who does not surpass his master. -Leonardo da Vinci

2022 Tax Planning: Educational Savings Plans

As a parent with young children, you are faced with many rewards and challenges. One of which may be saving for the high cost of a college education. However, there are two tax-favored options that might be beneficial: a qualified tuition program and a Coverdell education savings account. In addition, you might also want to invest in U.S. savings bonds that allow you to exclude the interest income in the year you pay the higher education expenses. Each of these options has their benefits and limitations, but the sooner you choose to make the investment in your child’s future, the greater the tax savings.

Qualified Tuition Program (QTP). A qualified tuition program (also known as a 529 plan for the section of the Tax Code that governs them) may be a state plan or a private plan. A state plan is a program established and maintained by a state that allows taxpayers to either prepay or contribute to an account for paying a student’s qualified higher education expenses. Similarly, private plans, provided by colleges and groups of colleges allow taxpayers to prepay a student’s qualified education expenses. These 529 plans have, in recent years, become a popular way for parents and other family members to save for a child’s college education. Though contributions to 529 plans are not deductible, there is also no income limit for contributors.

529 plan distributions are tax-free as long as they are used to pay qualified education expenses for a designated beneficiary. As much as $10,000 of distributions may be used for enrollment at a public, private, or religious elementary or secondary school. Qualified higher education expenses include tuition, required fees, books and supplies. For someone who is at least a half-time student, room and board also qualifies as higher education expense.

For any distribution made after 2018, qualified education expenses of 529 plan include certain expenses associated with registered apprenticeship programs and qualified student loans. Apprenticeship program expenses includes expenses for fees, books, supplies, and equipment required for the participation of the designated beneficiary in an apprenticeship program registered and certified with the Department of Labor. Qualified education expenses of 529 plans include up to $10,000 of principal or interest on any qualified student loan of the designated beneficiary or a sibling (brother, sister, stepbrother, or stepsister).

Coverdell education savings accounts. Coverdell education savings are custodial accounts similar to IRAs. Funds in a Coverdell ESA can be used for K-12 and related expenses, as well as higher education expense. The maximum annual Coverdell ESA contribution is limited to $2,000 per beneficiary, regardless of the number of contributors. Excess contributions are subject to an excise tax.

Entities such as corporations, partnerships, and trusts, as well as individuals can contribute to one or several ESAs. However, contributions by individual taxpayers are subject to phase-out depending on their adjusted gross income. The annual contribution starts to phase out for married couples filing jointly with modified AGI at or above $190,000 and less than $220,000 and at or above $95,000 and less than $110,000 for single individuals.

Contributions are not deductible by the donor and distributions are not included in the beneficiary’s income as long as they are used to pay for qualified education expenses. Earnings accumulate tax-free. Contributions generally must stop when the beneficiary turns age 18, except for individuals with special needs. Parents can maximize benefits, however, by transferring the older siblings’ account balance to a younger brother, sister or first cousin, thereby extending the tax-free growth period.

U.S. Savings Bonds. If you redeem qualified U.S. savings bonds and pay higher education expenses during the same tax year, you may be able to exclude some of the interest from income. Qualified bonds are EE savings bonds issued after 1989, and Series I bonds (first available in 1998). The tax advantages are minimized unless the redemption of the bonds is delayed a number of years, therefore some planning is required.

The exclusion is available only for an individual who is at least 24 years of age before the issue date of the bond, and is the sole owner, or joint owner with a spouse. Therefore, bonds purchased by children or bonds purchased by parents and later transferred to their children, are not eligible for the exclusion. However, bonds purchased by a parent and later used by the parent to pay a dependent child’s expenses are eligible. The exclusion is, however, phased out and eventually eliminated for high-income taxpayers.

Educational assistance. Payments made by an employer after March 27, 2020 and before January 1, 2026, to either an employee or a lender to be applied toward an employee’s student loans are excludable. The payments can be of principal or interest on any qualified education loan. An employer may pay up to $5,250 each tax year toward an employee’s student loans, and that amount would be excludable from the employee’s income. The $5,250 cap applies to the new benefit for student loan repayment assistance and other educational assistance already provided, such as for tuition, fees, and books. Any excess of benefits is subject to income and employment taxes.

Of course, in planning for higher-education costs, parents may also choose to use funds from an individual retirement account or a traditional form of savings. In addition, higher education costs may be supplemented with scholarships, loans and grants. However, having a viable plan as early as possible in a child’s life will make maximum use of a family’s financial resources and may provide some tax benefit. If you would like to explore how these opportunities can work for you and have us fully evaluate your situation, please do not hesitate to call.

 

Preface: The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.6 percent in January on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 7.5 percent before seasonal adjustment. – USBLS News February 10, 2022

If Inflation Conditions Where Will Your Business Be? (Segment IV)

Working capital in entrepreneurship should be given paramount attention during inflationary economic expansions. Historically, during gradual or more rapid inflation, prices rise as too much money chases too few goods. This is the current experience on Main Street American, from grocery store aisles to auto dealerships. But, more importantly, inflationary trend impacts are not solely financial but also extend into the social fabric of daily life. More so, astute observers realize that in prior decades, inflationary gauges monitored changes in packaging sizes and unit costs as changes to inflation rates. In 2022, times are a ‘changing. 

Working capital management during an inflationary business environment bestows the clear expectation that as the inflation rate climbs, so too does the cost of capital. As a result, capitalists require a higher rate of return on their investments, i.e., as the present value of the investors liquid capital decreases from inflationary effects, capitalists have a necessary incentive to be fully invested, leading to a shortage of reserve capital for future needs, say particularly for those financing outside of the banking system. 

For example, any top hat investor who had $1.0m of cash in the bank in March of 2020 could still have $1.0m of money in the bank. Yet pricing that $1.0m investment is in dollars, say. If that same investor compares the number of pickup trucks, houses, steaks, or boxes of cereal that the $1.0m could purchase in 2020 to just two years later, we soon realize that most investors desire a higher rate of return on such an investment continent on prescient projected trends. Correspondingly, the present value of money changes substantially and rapidly. Hence, any business that requires a 40% to 50% capital build to keep their inventory stocked, such as an auto dealership, has two options for financing – debt or equity. 

Again, looking forward, any business financing growing working capital builds in inventory or scaling overhead costs with equity will want and need a higher rate of return on their assets to compensate for the additional balance sheet risks. This flywheel of too much money chasing too few goods leads to the trending expectation of higher net income for entrepreneurs so the entrepreneur can obtain a higher rate of return on working capital to compensate for the higher risks, resulting in higher costs customers. On that track, the customers paying the higher costs will either obtain their working capital from higher wages or more passive income? Or may it also include a shortage in the household budget?

When a business cannot raise prices during inflation, it will need to accept a lower rate of return on working capital and, therefore, lower net profitability. For an asset-intensive business with substantial debt, that scenario is most challenging. However, a company can also manage working capital costs by reducing the level or amount of capital required for activities, reducing its financial risk in the marketplace. 

Inflation often leads to reduced capital expenditures in the long term because the economic costs of those capital expenditures multiply based on the elevated cost of capital. As capital expenditures decrease, so will the activity in the associated economic food chains. Businesses who enter an inflationary cycle with a working capital structure of mostly debt, based on leveraging a higher rate of return or asset building plan, will discover that if they don’t score above an A on inflationary trend projections, they have little room for error, and perhaps none. Businesses with higher levels of equity working capital are not guaranteed worry-free navigation, but reducing a cash conversion cycle is a starting point to manage financial risks during inflationary periods.

Quoting Fed Chairman Alan Greenspan from 1996 – Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the past inflation rate. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? Summarized = we may not know what asset euphoria looks like, but the above quote counsels it as a sign of the peak on an economic sine wave.

Inflationary theories or facts, perhaps exemplified in Venezuela, show that interest rates trend with inflation rates. This leads to a high cost of capital in times of higher inflation. Recent reports for Venezuela detail that the country runs on the confidence of US Dollars, and money exchanges are vital, as the inflation rate in its currency was 686.4% for 2021 and interest rates were above 50%. Is that a currency meltdown in terms of conserving denominated wealth? Without mentioning taxes on the capital gains appreciation in such an economic environment, simply losing least is winning? The world is powered with dollars, and while a bastion as the world’s reserve currency, if usurped, would seem to perhaps resemble an H.G. Wells 1897 The War of the Worlds state, but I’ve only glanced at those works, so I should refrain from further comment.   

Finally, one generally concerning factor of the inflationary flywheel is any passive quasi-government subsidy or  fixed income supplement recipients, if not to be left behind, will also need additional funds. Perhaps this is to be afforded? It will require additional debt or higher taxes, or both. Either option presents substantial risks to maintaining stable working capital rates and a stable pricing environment for an affable entrepreneurial marketplace that more than a few have genuinely credited as a status quo.

 

Preface: “If I have ever made any valuable discoveries, it has been due more to patient attention, than to any other talent”
― Isaac Newton

If Inflation Conditions Where Will Your Business Be? (Segment III)

Entrepreneurs looking for the truths of inflationary business navigation should consider that most research points to a clear correlation between commodities prices and the measurement of inflation trends with the consumer price index. The consumer price index incorporates a number of goods, food at home, food away from home, energy, gasoline, new vehicles, used vehicles, electricity, and commodities. 

Historically, trends in commodity indexes have consistently correlated closely with inflation while typically uncorrelated with equity and bond market trends say. The phrase “commodity business” is often highly partisan, yet entrepreneurial participants in commodity products such as corn or wheat, cotton or coffee, sugar or lumber – should generally welcome economic developments with an inflationary trend towards a brighter future. Given this historic hinge, commodity-based businesses may continue to gain perspective altitude should inflation persist and its momentum elongates.

Considering that in the early 80s, when inflation was effectively reigned in, when Fed Chairman Volcker increased the prime-rate at a rocket fuel rate, creating a host of changes for commodity entrepreneurs from the mid-west corn belt to mining enterprises. The decade following for those highly leveraged in certain industries were perhaps not the best of years. Today unlike variables again prevail for stakeholders in the commodity complex, including but not limited to thee following, tax legislation, expansion in monetary aggregates, monetary controls, and supply logistics. 

Firstly, every taxpayer is a commodity stakeholder, from fuel or food purchases say. So the marginal pressure in higher operating costs transfers the pricing baton from one stakeholder to the next, i.e., one business’s expenses are another revenue. Another example is as the cost of new construction increases from raw materials of say lumber or steel, this flywheel creates more income for those sourcing those goods from inventories at the higher value, say? Secondly, say for some crypto speculator, $50.00 per bushel wheat would likely not be enough incentive to purchase a farm and learn to drive a tractor or combine.

Therefore, despite the higher cost of toast for breakfast, and the corresponding lack of incentives to fix the logistics of a supply chains with that commodity scenario, is would likely not be resolved from a computation of a few more algorithms to manufacture $$$M of virtual currency.  

Concerningly, leading economic spoke-persons have repeated said that inflationary pressures are transient. If inflation is a trend with monetary motion, we should perhaps consider a snippet of  historic wisdom from Sir Isaac Newton – Newton’s first law of motion. In Newton’s first law, an object will not change its motion unless a force acts on it. Further, In the second law, the force on an object is equal to its mass times its acceleration. In the third law, when two objects interact, they apply forces to each other of equal magnitude and opposite direction. 

The point of referencing Newton’s laws is that after $$.0T of the monetary motion says to restart the economy since the Pandemic shutdowns, there has been a lot of monetary acceleration in asset prices. What is the affordability of a reprise? Bottom-line, any intentional effort short of gradual decreases in acceleration will create visible challenges for entrepreneurs, i.e., why would anyone entrepreneur with momentum want inflation to slow, yet? 

Shifting to logic -for those who enjoy math, let’s reflect on the following. 

https://www.omnicalculator.com/math/exponential-growth

Consider the following problem: the population of a small city at the beginning of 2019 was 10,000 people. It was noticed that the population of the city grows at a steady rate of 5% annually. What should you do to calculate the projected population size in the year 2030? From the given data, we can conclude the initial population value, x₀, equals 10,000. Also, we have the growth rate of r = 5%.

Therefore, the exponential growth formula we should use is:

x(t) = 10,000 * (1 + 0.05)t = 10,000 * 1.05t.

Here t is the number of years passed since 2019. In our case, for the year 2030, we should use t = 11 since this is the difference in the number of years between 2030 and the initial year 2019. Finally, we get:

x(11) = 10,000 * 1.0511 = 17,103.

So, the projected number of inhabitants of our small city in the year 2030 is around 17,103.

……..There are numerous cases where the formula for exponential growth and decay is used to model various real-world phenomena:

• • • • population growth of bacteria, viruses, plants, animals, and people;
      • the atmospheric pressure of air at a certain height;
      • compound interest and economic growth;
      • the processing power of computers etc.

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Looking forward to the next decade of pricing expectations in entrepreneurship , will revisions to the above exponential growth formula be necessary based on the following data? 

–From 1913 to 2008, the US Money Supply increased $800.000B; From 2008 to 2021, it grew from $800B to $8,800B.

Compounding interest is a sharp double-edged sword. Now, if Sir Isaac Newton were only sitting in his orchard, and could  construe and publish the possibilities and essential amendments to the above formula for a stable price variances in the the worlds entrepreneurial marketplace through 2032 say?

Until next time….