Blockbuster Taxes
Memorial Day came early this year, and that means we get more time with our summer whites! (Of course, summer doesn’t “officially” start until June 21, but who’s counting?) For millions of Americans, cooling off at the movies with a bucket of popcorn and gallon of soda is a favorite part of the season. So we wondered . . . what would all that carnage look like from a tax perspective?
- San Andreas: “The Big One” finally hits California, and helicopter rescue pilot Dwayne “The Rock” Johnson melodramatically sets off to save his estranged daughter. Meanwhile, up and down the California coast, accountants stay busy rescuing clients with casualty loss deductions.
- Hot Pursuit: Reese Witherspoon plays an uptight policewoman protecting a druglord’s widow as the pair flees crooked cops and murderous gunmen in Texas. (When are the gunmen in movies ever not murderous?) Proceeds from drug trafficking are taxable, of course — we all know who finally got Al Capone. Sadly for our widow, Section 280E of the tax code prohibits deductions for any trade or business that “consists of trafficking in controlled substances.” Guess she should have thought of that before she became a druglord’s widow!
- Inside Out: Pixar’s newest computer-animated sure-to-be-hit is set inside the head of 11-year-old Riley, as five emotions guide her life: Joy (Amy Poehler), Disgust (Mindy Kaling), Fear (Bill Hader), Sadness (Phyllis Smith), and Anger (Lewis Black). Well, someday, Riley is going to earn her first paycheck, come home, and ask Mom, “What’s FICA?” Which one of the five do you think is going to take over her mind then? It might just be all of them!
- Mad Max: Fury Road: Max and his fellow rebel Furiosa race a cross a post-apocalyptic Australian “Wasteland” in search of gasoline, explosions, random violence and other essentials of life. Tax collectors weep as not a dime of tax gets paid into the Highway Trust Fund. Of course, there may not even be a Highway Trust Fund in Australia . . . . hey, wait a minute, there won’t even be any tax collectors after the apocalypse!
- The Avengers: Age of Ultron An all-star team of superheroes including Iron Man, Captain America, Thor, the Hulk, Hawkeye, and the Black Widow team up to save the world from the creepy Ultron. No tax “hook” here in the movie, but if star Robert Downey Jr. cashes another $50 million paycheck like he did after Iron Man 3, he’ll be Man of the Year at the IRS.
- Terminator: Genesys: Arnold Schwarzenegger returns for a fourth go-round since his time-traveling robot debuted back in 1984. The new movie alters events from the first set of films in an alternate timeline, whatever that means. Shouldn’t the Terminator be paying estate tax by now? And if he goes back in time, does he get a refund of whatever estate tax he already paid?
We realize that smart tax planning isn’t as exciting as defeating Ultron. It won’t save as much as one of Robert Downey’s paychecks. (At least it’s easier to understand than the mind of an 11-year-old girl!) But smart tax planning is the key to paying less. And it takes less time to call us than it does to sit through the previews at your local multiplex. So what are you waiting for?
In The Headlines
Verizon Bets on Video Streaming with the Acquisition of AOL
Verizon, the country’s largest wireless carrier, has announced that it intends to purchase AOL for $4.4 billion in cash, pending regulatory approval. The deal, which is the latest marriage of convenience between U.S. media and wireless companies, comes a year after rival AT&T agreed to buy satellite TV provider DirecTV for $48.5 billion in an ongoing transaction. As part of the acquisition, Verizon is getting AOL’s websites, which include The Huffington Post, TechCrunch, and Engadget, with a combined 200 million unique monthly visitors. It is also inheriting AOL’s programmatic advertising technology, which the company has invested heavily in (AOL itself purchased Adap.tv in 2013, a platform that connects buyers and sellers of online video advertising).
As Snapchat’s reported 100 million monthly users might attest, media consumption is moving to mobile and to video. The factor that makes this deal especially attractive for Verizon is AOL’s video and original content, which include the Emmy-nominated series Park Bench with Steve Buscemi and The Future Starts Here. If the deal goes through, Verizon will absorb AOL’s 2 million subscribers. Verizon customers, for their part, likely won’t see any major changes, at least not right away.
Verizon has said that it plans to launch a streaming video service for mobile devices this summer, similar to Hulu and Netflix apps which let consumers watch videos on their smartphones and tablets. The service is expected to offer a mix of paid, free, and ad-supported content. It might also include multicast programming to deliver live content like sports and concerts. When Verizon’s streaming service does appear, users can expect to see tailored adverts and content, says M.S. Krishnan, a Professor of Technology & Operations at the University of Michigan’s Ross School of Business. “Verizon has a strong presence in the millions of customers that they have in the mobile platform,” explains Krishnan. “AOL has a very useful digital advertisement platform where advertisers can go bid for advertisement slots. Now, think about how they could use that to personalize advertisements and contextualize it based on what they know about [Verizon] mobile customers – they would move towards the personalization of ads and content.”
As more viewers abandon cable, customers can also expect to see increasing variety in the levels of cable service offered by Verizon, which has already started providing options to its bundle package. “In many ways, this is vertical integration,” Krishnan concluded. “Verizon and AT&T are carriers, but they want to get into media and content to increase the opportunity for revenue.” Lauren Elkin, co-director of the Tech, Media & Telecom team at Nasdaq, believes customers can expect to see more mergers and acquisitions in the space. “Traditional providers are needing to adapt and seek out new revenue streams,” Elkin explained.
While Verizon’s acquisition is a relative bargain, AT&T is spending over 10 times more on its video play—we could see incumbent carriers picking up little-known companies that could bolster their digital advertising dollars. “Digital advertising spending is growing at a fast clip,” said Elkin. ”We will likely continue to see deals with larger names eating up smaller ad tech companies.” (Two small, digital advertising companies, Rocket Fuel and Millenial Media, saw their stock rise 8% and 3% respectively following the Verizon/AOL news yesterday.)
It remains to be seen whether the consolidation of content creator and distributor will impinge on net neutrality, since Verizon’s customers give AOL a potential captive audience on an unprecedented scale. Still, regulators will likely ensure that the network provider gives all services equal opportunity.
Krishnan says that is not a pressing concern, remarking that “The monopolistic hold that carriers had before has already shifted to mobile device manufacturers – Apple and Android put a dent on the power these carriers had.”
Self-Driving Semis Hit the Road
A car that drives itself may be nirvana for daily commuters, but operators of long-haul trucks could reach this goal first. At a recent press conference in Nevada, the largest heavy-duty truck manufacturer in the U.S., Freightliner, unveiled a prototype 18-wheeler called the “Inspiration Truck,” the world’s first self-driving truck licensed for road tests. What sets it apart from every other semi on the road is its so-called Highway Pilot system, which uses radar sensors, cameras, and servo motors to detect objects and lane markings around the truck and take over steering, braking, and accelerating from the driver. At a nighttime unveiling atop the Hoover Dam, Wolfgang Bernhard, the global head of trucks and buses for Freightliner’s parent company, Daimler, said he expects the technology to add a “new dimension of safety.”
The self-driving mode works like this: While traveling along a clearly marked road, the truck’s main display will light up an indicator telling you Highway Pilot is available. You can activate it by pushing a button on the steering wheel. The system is similar to cruise control, except that it also steers the truck. You have to stay behind the wheel, though, in case the software determines that it cannot handle upcoming twists and turns. In that case, the dash starts a 20-second countdown back to human driving. The implications are far greater than being able to reply to an e-mail while waiting to merge. More than 3,600 Americans died in crashes with a heavy truck in 2013, according to the Insurance Institute for Highway Safety. Although federal regulations limit truck drivers to 11 hours a day behind the wheel, that is still a lot of time—and it is unclear how many abide by the rule. “Ninety percent of truck accidents are due to driver error, and 1 in 8 of those are due to driver fatigue,” according to Bernhard.
Daimler tested a self-driving Mercedes-Benz truck prototype in Germany last fall, but the U.S. is a more rigorous proving ground, says Martin Daum, head of Daimler Trucks North America. “The distances traveled in North America are far greater than what’s usually driven in Europe,” says Daum. U.S. trucks travel more than 50% farther each year than, say, a truck in Germany, says the nonprofit International Road Federation.
Lest unions start picketing Freightliner factories, executives were quick to note that the Inspiration Truck is a Level 3 autonomous vehicle, as defined by the National Highway Traffic Safety Administration. That means a driver must remain at the wheel at all times while the truck is in motion and be able to take over driving “with a sufficiently comfortable transition time,” according to the agency’s regulations. Daum says tomorrow’s driver will be a “logistics manager” who oversees the automated systems, talks with dispatchers, and drives the truck in places like cities. “The human brain is still the best computer money can buy,” he says.
About 3 million heavy-duty trucks in the same class as the Inspiration move 9.2 billion tons of freight in the U.S. each year, estimates the American Trucking Associations. Fleet owners such as UPS and J.B. Hunt Transport are not generally early adopters when it comes to new technology, but as online shopping tilts more commerce from physical stores to shipped packages, major trucking companies are likely to need more vehicles. The American Trucking Associations and researcher IHS Global Insight estimate that by 2025, U.S. freight tonnage will have risen 23.5% from its 2013 figure. “This comes with a big challenge,” says Bernhard. “We have to manage the growth of our industry in a way that works for the environment and the economy. And that’s exactly what autonomous trucks can do.”
Like other self-driving vehicles, Daimler’s technology is not legal in most places yet. Nevada is the only state letting Freightliner test its Inspiration Trucks, and Daum says not to expect one alongside you on the highway anytime soon. But he says he hopes to show regulators that the truck makes things easy enough for drivers that they should be allowed to spend more than 11 hours behind the wheel. Freightliner is also lobbying for permission to update some of its other systems, including by replacing rearview mirrors with smaller video cameras.
Governor Brian Sandoval personally affixed the first Inspiration Truck’s license plate, and Freightliner has the lead for now. But Daimler should expect competitors to catch up quickly, says Steven Volkmann, an analyst for investment bank Jefferies. “Freightliner deserves kudos for being the first, but they won’t be the last,” Volkmann says. “Something like this is inevitable.”
Citations
1. http://onforb.es/1JkHt91 – Forbes
2. http://bloom.bg/1L7VsxY – BusinessWeek
The Good News Is . . .
• U.S. housing starts jumped to their highest level in nearly 7 ½ years in April and permits soared, hopeful signs for the economy. Groundbreaking on new homes surged 20.2% to a seasonally adjusted annual pace of 1.14 million units, the highest since November 2007, the Commerce Department said. The percent increase was the biggest since February 1991. March’s starts were revised up to a 944,000 unit rate instead of the previously reported 926,000 unit pace.
• Salesforce.com, Inc., a leading cloud-based provider of CRM software, reported earnings of $0.16 per share, an increase of 45.5% over year-ago earnings of $0.11. The firm’s earnings topped the consensus estimate of analysts by $0.02. The company reported revenues of $1.5 billion, an increase of 23.2%. Management attributed the company’s results to strong growth in subscriptions and professional services revenues.
• Ascena said it would buy the parent company of Ann Taylor and Loft for $2.16 billion, in a move that catapults it into the ranks of the biggest clothing retailers in the U.S. The two companies combined posted sales last year of over $7 billion, and operate almost 5,000 stores between them. The rise of fast-fashion brands like H&M and Zara—as well as steep discounters like T. J. Maxx—have flooded the market with inexpensive style options for both the home and office, putting intense pressure on Ann Taylor and other women’s apparel brands to discount their own wares. Ascena is hoping that shoppers will return to brands like Ann Taylor for better-quality clothes. Under the terms of the deal, Ascena will pay Ann Taylor shareholders $37.34 in cash and 0.68 of a share of Ascena.
Citations
1. http://1.usa.gov/1kyNS3E – US Dept. of Housing & Urban Development
2. http://www.cnbc.com/id/18080780/ – CNBC
3. http://sforce.co/1FEs5o7 – Salesforce.com, Inc.
4. http://nyti.ms/1LA3Bvi – NY Times Dealbook
Planning Tips
Tips for Understanding Commercial Mortgage-Backed Securities
Investors in commercial real estate can make money via appreciation when they sell, but most returns come through the income generated by rents paid by tenants. One way to tap into the commercial real estate market is via commercial mortgage-backed securities, (CMBS), which are interest-paying bonds that hold bundles of commercial mortgages. The total value of issued of CMBS is expected to rise to $150 billion in 2017 from an anticipated $115 billion in 2015, according to the Urban Land Institute’s Real Estate Consensus Forecast. Below are some guidelines to help you better understand these securities. All investments involve a degree of risk, so before considering an investment in CMBS, be sure to consult with your financial advisor.
Definition of Commercial Mortgage-Backed Securities (CMBS) – A commercial mortgage-backed security (CMBS) is a type of fixed-income security that is collateralized by commercial real estate loans. Typically these loans are for commercial properties such as office buildings, hotels, malls, apartment buildings, and factories, etc., but not single-family homes. In essence, CMBS are created when a bank takes a group of loans on its books, bundles them together
How CMBS work – Investors who hold a CMBS receive, as payment, the interest and principal repayments on these mortgages. Therefore, investors principally take on the borrower’s risk of default (non-repayment). Unlike residential mortgage-backed securities, however, a CMBS does not present pre-payment risk to the holder, since commercial mortgage loans are set at a fixed term. The mortgages that back the securities are classified into tranches (or classes) of risk. This allows investors to purchase a CMBS that fits their risk preference. Higher tranches (usually designated as A) have a higher rate of return because they receive both interest and principal payments, but also have a greater amount of risk (if the borrower can’t make the payments, the investor gets nothing). Lower tranches (usually designated as B, C, or even D) carry lower risk at a lower rate of return because they absorb only interest payments on mortgages with shorter terms to repayment.
How to invest in CMBS – While an individual could conceivably invest in a commercial mortgage-backed security, typically only the very wealthy, sophisticated investor that would do so. There are no mutual funds specifically dedicated to CMBS, but many bond or real estate-related funds invest a portion of their portfolios in CMBS when the asset class offers value. An example of an exchange-traded fund (ETF) that tracks the commercial mortgage-backed securities market is the iShares Barclays CMBS Bond Fund.
Benefits of CMBS – CMBS provide a less risky way to gain exposure to the commercial real estate market than through real estate investment trusts (REITs). REITs are equity securities whereas CMBS are debt securities. Also, CMBS provide attractive yields, relative to their duration (interest rate sensitivity) than many other segments of the bond market. This means that CMBS may offer an attractive combination of risk and return potential. The income from CMBS is generated by rents from tenants that typically have long term leases.
Risks associated with investing in CMB – As is the case with corporate bonds, commercial mortgage-backed securities are at risk of default. If the underlying borrowers fail to make their principal and interest payments, CMBS investors can experience a loss. The risk of individual issues can vary based on the strength of the property market in the specific area where the loans originated, as well as by the date of issuance. CMBS can also be negatively affected by weakness in the real estate market, which was the case during 2009. CMBS lending dried up in the wake of the financial crisis of 2008, but it gradually came back as market conditions improved. Post-crisis CMBS tend to be larger and characterized by more stringent underwriting standards. The loans that back CMBS typically are for a fixed term, meaning that they cannot be repaid early by the borrower without a penalty. As a result, CMBS typically offer substantially lower prepayment risk than residential mortgage-backed securities (i.e., securities that are backed by mortgages on single-family homes). Prepayment risk is the possibility that falling interest rates will cause borrowers to refinance and pay back their old mortgages sooner than expected, causing the investor to receive a lower yield than they had anticipated.
Citations
1. http://bit.ly/1AsGfGN – InvestingAnswers.com
2. http://bit.ly/1cSgqFf – Investopedia
3. http://abt.cm/1LA3KyT – About.com
4. http://on.wsj.com/1wsu5VJ – Wall Street Journal
5. http://bit.ly/1JOf0Zc – SeekingAlpha.com
