Category: Uncategorized

Preface: “It is amazing what you can accomplish if you do not care who gets the credit.” – Harry Truman

2022 Tax Planning: Hiring Family Members

One of the advantages of someone running their own business is hiring family members, which can provide a tax deduction for compensation paid. When including family members in business enterprises, certain tax attributes and employment tax rules apply.

Both spouses carrying on a trade or business

If spouses carry on a business together and share in the profits and losses, they may be partners whether or not they have a formal partnership agreement. There are different filing requirements for a sole proprietor vs. a joint venture as a partnership. The spouses can elect not to treat the joint venture as a partnership by making a qualified joint venture election.

Qualified joint venture

Spouses may elect treatment as a qualified joint venture instead of a partnership. A qualified joint venture conducts a trade or business where:

• The only members are a married couple who file a joint return,

• Both spouses materially participate in the trade or business, and

• Both spouses elect not to be treated as a partnership.

Only businesses owned and operated by spouses as co-owners and not in the name of a state law entity, such as a limited partnership or limited liability company, are eligible for the qualified joint venture election.

Employment taxes. If the business has employees, either of the spouses as sole proprietors may report and pay the employment taxes. The spouse, as an employer, must have an EIN for their sole proprietorship. If the business filed or paid employment taxes for part of the year under the partnership’s EIN, the spouse may be considered the employee’s “successor employer” for purposes of figuring whether wages reached the Social Security and federal unemployment wage base limits.

The wages for the services of an individual who works for their spouse, or parent employed by a child, are subject to income tax withholding and Social Security and Medicare taxes, but not the Federal Unemployment Tax Act (FUTA).

Additionally, there are special rules for children employed by parents. Children under the age of 18 are not subject to Social Security and Medicare taxes on their wages if the business is a sole proprietorship or a partnership in which each partner(s) is a parent of the child. Additionally, the payments for wages to a child under age 21 are not subject to FUTA.

Preface: “If you want happiness for an hour, take a nap. If you want happiness for a day, go fishing. If you want happiness for a year, inherit a fortune. If you want happiness for a lifetime, help somebody” – Chinese Proverb

2022 Tax Planning: Charitable Giving

You probably appreciate that you can get an income tax deduction for a gift to a charity if you itemize your deductions. But there is a lot more to charitable giving. For example, you may be able give appreciated property to a charity without being taxed on the appreciation. Or charitable giving may be part of your overall estate planning. These benefits can be achieved, though, only if you meet various requirements including substantiation requirements, percentage limitations and other restrictions. We would like to take the opportunity to introduce you to some of these requirements and tax saving techniques.

First, let’s look at the basics: Your charitable contributions can help minimize your tax bill only if you itemize your deductions. Once you do, the amount of your savings varies depending on your tax bracket and will be greater for contributions that are also deductible for state and local income tax purposes.

Itemizers

Under the 2017 Tax Cuts and Jobs Act, the percentage limitation on the charitable deduction contribution base is increased from 50 percent to 60 percent of an individual’s adjusted gross income for cash donations to public charities in 2018 through 2025. There is an even greater benefit, because in addition, the phase-out of allowable itemized deductions is repealed for tax years 2018 through 2025.

Contributions to certain private foundations, qualifying organizations and  approved societies are limited to 30 percent of adjusted gross income. A special limitation also applies to certain gifts of long-term capital gain property.

Taxpayers over 70 ½ years of age are allowed an exclusion from gross income for distributions from their IRA made directly to a charitable organization of up to $100,000 ($100,000 for each spouse on a joint return). A qualified charitable distribution counts toward satisfying a taxpayer’s required minimum distributions from a traditional IRA.

Contributions must be paid in cash or other property before the close of your tax year to be deductible, whether you use the cash or accrual method. Your donations must be substantiated. Generally, a bank record or written communication from the charity indicating its name, the date of the contribution and the amount of the contribution is adequate. If these records are not kept for each donation made, no deduction is allowed. Remember, these rules apply no matter how small the donation.

However, there are stricter requirements for donations of $250 or more and for donations of cars, trucks, boats, and aircraft. Additionally, appraisals are required for large gifts of property other than cash. Finally, donations of clothing and household gifts must be in good used condition or better to be deductible.

There are other special charitable giving techniques beyond the usual gifts of cash. These include, among others, a bargain sale to a charity, a gift of a remainder interest in your residence and a transfer to a charity in exchange for an annuity.

Please do not hesitate to contact us if you have any questions about any of the themes raised in this letter.

Preface: “Find out where the people are going, and buy the land before they get there.” — William Penn Adair, politician

2022 Industry Planning: Rental Real Estate as Qualified Business Income

If you operate a rental real estate enterprise, you may qualify to claim the business income deduction under Section 199A in one of two ways.

Qualified Business Income Deduction (QBID)

Congress enacted Section 199A to provide a deduction to non-corporate taxpayers of up to 20 percent of the taxpayer’s qualified business income from each of the taxpayer’s qualified trades or businesses, including those operated through a partnership, S corporation, or sole proprietorship. Individuals, estates and trusts can also deduct 20 percent of aggregate qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership income. The deduction is effective for tax years beginning after December 31, 2017, and before January 1, 2026.

The QBI deduction is calculated as the lesser of:

• combined qualified business income (up to 20% of qualified business income, plus 20% of REIT dividends and publicly traded partnership income); or

• 20% of the excess (if any) of taxable income over net capital gain.

In order to qualify for the deduction, the business must be a qualified trade or business which is defined as any trade or business other than a specified service trade or business (SSTB) or the trade or business of performing services as an employee.

Rentals meet the definition of a qualified trade or business in one of two ways:

• real estate rentals to a commonly owned business; or

• under a safe harbor for certain rental real estate activities.

Rentals to a commonly owned business

A rental activity is treated as a qualified trade or business if it rents or licenses tangible or intangible property to a commonly owned trade or business. A business and a rental activity are commonly owned if the same person or group of persons directly or indirectly owns at least 50 percent of each of them. Businesses can meet this common-ownership test even if they are not otherwise eligible for aggregation.

Safe Harbor for Rental Real Estate Enterprise

Under a safe harbor, a rental real estate enterprise is treated as a trade or business for purposes of Section 199A only if:

• separate books and records are maintained to reflect income and expenses for each rental real estate enterprise;

• at least 250 hours of rental services are performed per year; and

• for tax years beginning after 2019, the taxpayer maintains sufficient contemporaneous records.

Call our office if you’d like to discuss how you might arrange your rental business to meet the requirements for Section 199A and take full advantage of the deduction.

Preface: “For those who have dreamed of being of farmer at heart, working from a barndominium is the ideal lifestyle.” – Vermont enthusiast

2022 Tax Planning: Optional Standard Mileage Rates

Businesses generally can deduct the entire cost of operating a vehicle for business purposes. Alternatively, they can use the business standard mileage rate, subject to some tax rule exceptions. The deduction is calculated by multiplying the standard mileage rate by the number of business miles traveled. Self-employed individuals also may use the standard rate, as can employees whose employers do not reimburse, or only partially reimburse, them for business miles driven.

Many taxpayers use the business standard mileage rate to help simplify their tax recordkeeping. Using the business standard mileage rate takes the place of deducting almost all of the costs of your vehicle. The business standard mileage rate considers costs such as maintenance and repairs, gas and oil, depreciation, insurance, and license and registration fees.
Beginning on January 1, 2022, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) are:

• 58.5 cents per mile for business miles driven, up from 56 cents for 2021
• 18 cents per mile driven for medical or moving purposes, up from 16 cents for 2021
• 14 cents per mile driven in service of charitable organizations, no change from 2021

Mileage related to unreimbursed business expenses and moving expenses are limited to certain taxpayers as a result of the Tax Cuts and Jobs Act for tax years 2018 through 2025.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.

Taxpayers may have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates. If instead of using the standard mileage rate you use the actual expense method to calculate your vehicle deduction for business miles driven, you must maintain very careful records. You must keep track of the actual costs during the year to calculate your deductible vehicle expenses. One of the most important tools is a mileage logbook.

Our office can help you compare the benefits of using the business standard mileage rate or the actual expense method.

2022 Tax Planning: Home Office Deduction

Taxpayers who use their home for business may be eligible to claim a home office deduction. It allows qualifying taxpayers to deduct certain home expenses on their tax return. This can reduce the amount of the taxpayer’s taxable income. Here are some things to help taxpayers understand the home office deduction and whether they can claim it:

The home office deduction is available to both homeowners and renters for tax purposes. There are certain expenses taxpayers can deduct for taxes. They include mortgage interest, insurance, utilities, repairs, maintenance, depreciation, and rent. Taxpayers must meet specific requirements to claim home expenses as a deduction. Even then, the deductible amount of these types of expenses may be limited.

The term “home” for purposes of this deduction:

A) Includes a house, apartment, condominium, mobile home, boat, barndominium, or similar property.

B)  Also includes structures on the property. These are places like an unattached garage, barndominium, studio, barn or greenhouse.

C) Doesn’t include any part of the taxpayer’s property used exclusively as a hotel, motel, inn or similar business.

There are two basic requirements for the taxpayer’s home to qualify as a deduction:

A) There must be exclusive use of a portion of the home for conducting business on a regularly basis. For example, a taxpayer who uses an extra room to run their business can take a home office deduction only for that extra room so long as it is used both regularly and exclusively in the business.

B) The home must be the taxpayer’s principal place of business. A taxpayer can also meet this requirement if administrative or management activities are conducted at the home and there is no other location to perform these duties. Therefore, someone who conducts business outside of their home, but also uses their home to conduct business may still qualify for a home office deduction.

Expenses that relate to a separate structure not attached to the home will qualify for a home office deduction. It will qualify only if the structure is used exclusively and regularly for business.

Taxpayers who qualify may choose one of two methods to calculate their home office expense deduction:

A) The simplified option has a rate of $5 a square foot for business use of the home. The maximum size for this option is 300 square feet. The maximum deduction under this method is $1,500.

B) When using the regular method, deductions for a home office are based on the percentage of the home devoted to business use. Taxpayers who use a whole room or part of a room for conducting their business need to figure out the percentage of the home used for business activities to deduct indirect expenses. Direct expenses are deducted in full.

Contact Us

If you would like to discuss this tax planning opportunity and understand the ways in which you use your home regularly and exclusively for your business can minimize your tax bill, please call our office at your earliest convenience.

Preface: If I had to run a company on three measures, those measures would be customer satisfaction, employee satisfaction and cash flow. – Jack Welch

2021 Individual Tax Planning: Itemized Deductions

There are two approaches you can take deductions on your individual federal income tax return: a) you can itemize tax deductions or b) use the standard tax deduction. Tax deductions reduce the amount of your taxable income.

The standard deduction amount varies depending on your income, age, and your filing status. The amount is also adjusted annually for inflation. For 2021 the standard deductions amounts are $12,550 for married couples filing separately. $18,800 for heads of households. $25,100 for married couples filing jointly.

Certain taxpayers cannot use the standard deduction:

• • • •  A married individual filing separately whose spouse itemizes deductions.
      • An individual who files a tax return for a period of less than 12 months because of a change in his or her annual accounting period.
      • An individual who was a nonresident alien or a dual-status alien during the year.

Itemized deductions include amounts you paid for state and local income or sales taxes, real estate taxes, personal property taxes, mortgage interest. You may also include gifts to charity and part of the amount you paid for medical and dental expenses.

Often taxpayers would usually benefit most by itemizing if itemized deductions exceed the standard deduction amounts above:

• • • • •  Made large contributions to qualified charities
        • Paid substantial interest or taxes on your personal home
        • Had large “other” tax deductions
        • Had large uninsured medical or dental expenses

The higher standard deduction under Tax Reform means fewer taxpayers are itemizing their deductions. However, taxpayers may have an opportunity to itemize this year by keeping these tips in mind:

Deducting state and local income, sales and property taxes. The deduction that taxpayers can claim for state and local income, sales and property taxes is limited. This deduction is limited to a combined, total deduction of $10,000. It is $5,000 if married filing separately. Any state and local taxes paid above this amount can’t be deducted.

Refinancing a home. The deduction for mortgage interest is also limited. It’s limited to interest paid on a loan secured by the taxpayer’s main home or second home. For homeowners who choose to refinance, they must use the loan to buy, build, or substantially improve their main home or second home, and the mortgage interest they may deduct is subject to the limits described in the next bullet under “buying a home.”

Buying a home. People who buy a new home this year can only deduct mortgage interest they pay on a total of $750,000 in qualifying debt for a first and second home ($375,000 if married filing separately). For existing mortgages, if the loan originated on or before December 15, 2017, taxpayers continue to deduct interest on a total of $1 million in qualifying debt secured by first and second homes.

Donating items and deducting money. Many taxpayers often find unused items in good condition they can donate to a qualified charity. These donations may qualify for a tax deduction. Taxpayers must have proof of all cash and non-cash donations.

Deducting mileage for charity. Driving a personal vehicle while donating services on a trip sponsored by a qualified charity could qualify for a tax break. Itemizers can deduct 14 cents per mile for charitable mileage driven in 2022.

If you have any questions related to itemized deductions or tax planning in general, please call our office.

Preface: “Home isn’t a place, it is a feeling.” – Anonymous

Tips for Individuals Selling Their Home

The Internal Revenue Service has some important information to share with individuals who have sold or are about to sell their home. If you have a taxable gain from the sale of your main home, you may qualify to exclude all or part of that taxable gain from your income. Here are ten tax planning tips to keep foremost in mind when selling your home. 

1. In general, you are eligible to exclude the taxable gain from income if you have owned and used your home as your main home for two years out of the five years prior to the date of its sale (partial exclusions for shorter periods are allowed under certain extenuating circumstances).
2. If you have a gain from the sale of your main home, you may be able to exclude up to $250,000 of the gain from your income ($500,000 on a joint return in most cases).
3. You are not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home.
4. A surviving spouse who qualifies for the exclusion may exclude up to $500,000 of gain on the sale of a principal residence if the sale occurs not later than two years after the date of his spouse’s death and he or she has not remarried as of the date of sale.
5. If you can exclude all of the gain, but receive a Form 1099-S, you must report the sale on your tax return.
6. If you have a gain that cannot be excluded, it is taxable. You must report it on Form 1040, Schedule D, Capital Gains and Losses.
7. You cannot deduct a loss from the sale of your main home.
8. Generally, taxpayers must report forgiven or canceled debt as income on their tax return. This includes people who had a mortgage workout, foreclosure, or other canceled mortgage debt on their home. Taxpayers who had debt discharged after December 31, 2017, can’t exclude it from income as qualified principal residence indebtedness unless a written agreement for the debt forgiveness was in place before January 1, 2018.
9. If you have more than one home, you can exclude a gain only from the sale of your main home. You must pay tax on the gain from selling any other secondary home. If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time.
10. When you move from your home address, be sure to update your mailing address with the IRS and the U.S. Postal Service to ensure you receive refunds or correspondence from the IRS. Use Form 8822, Change of Address, to notify the IRS of your address change.

 

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….