Tales from the IRS
Cadillac Taxes for Everyone!
Employers have played a key role in financing their employees’ healthcare since World War II, when they threw in tax-free benefits to attract talent in a time of wage controls. So it’s no surprise that when Congress passed the Affordable Care Act, they gave employers all sorts of carrots and sticks to boost coverage. But Congress wanted to control overall costs, too, and didn’t want employers being too generous. So they imposed a new tax on so-called “Cadillac” plans. Technically, it takes the form of a 40% penalty on annual premiums exceeding $10,200 for an individual or $27,500 for a family. But everyone knows what the term “Cadillac” plan means, even if Cadillacs have nothing to do with the cost of healthcare.
That got us to thinking . . . if the folks in Washington think a tax on Cadillac plans is a good idea, why stop there? What other sorts of taxes could they think of imposing?
- The “Tiffany” Tax: The DeBeers group of companies, which monopolized rough diamond sales for much of the last century, helpfully “suggests” a young man spend two months’ salary on an engagement ring for his betrothed. That’s sweet and touching for the man who waits until he’s that established before wooing a bride. But blowing two months’ pay on something so purely symbolic hardly seems practical in today’s era of six-figure student loans and increasingly pricey starter homes. (And is that two months’ pre-tax or two months’ take-home?) A 40% premium on anything over a carat sounds about right here.
- The “Big Mac” Tax: Let’s face it, when you think of junk food, you think of McDonald’s. We know we need to eat less, but how? Former New York City Mayor Michael Bloomberg raised hackles when he tried to ban “Big Gulps” with more than 16 ounces of liquid candy in a single serving. He should have known that Americans will swallow a tax a lot faster than they’ll swallow a ban. Today’s point-of-sale computer systems could easily supersize sales taxes as calories, trans fats, and salt content go up.
- The “McMansion” Tax: The average American family has dropped from 3.01 people in 1973 to just 2.54 today. Yet the average American house has added 1,000 square feet in that same time. Do we really need all those extra bathrooms? And nobody really parks a third car in that oversized garage, do they? Property-tax authorities can easily build out their assessments to penalize bloated square footage, fake turrets, more than seven gables, and random stone accent walls.
- The “Dom Perignon” Tax: A generation ago, Orson Welles promised wine drinkers that Paul Masson would “sell no wine before its time.” (Paul Masson himself stomped on the grapes at 9AM, and it was in the freezer at your local 7-11 at 3PM, but who’s counting?) Now, it’s all “vintage” this and “artisanal” that, and you’re not a real wine aficionado if you haven’t sampled the latest Chilean Malbec. Governments already load up wine with hefty excise and sales taxes, but why not fortify them with an extra 40% for anything over, say, $40 a bottle?
Fortunately, none of those taxes are real . . . yet. That’s just as well, since we’ve got our hands full helping you pay less of the taxes Washington already imposes. The key, of course, is a plan. And with Labor Day just around the corner, it’s not too soon to start thinking about year-end planning. So call us when you’re ready to save. And don’t pass along any of these ideas to anyone who could actually make them happen!
Related Sources
1. Technology and You
In The Headlines
“Not-Coms” – Companies Create Their Own Domains
There is a downside to the relative freedom and lack of gatekeepers on the Internet, including that most anyone can buy a Web address that ends in “.com.” Online, scammers can pay $10 for an address that looks like that of your bank, your favorite clothier, or your auto dealer and create a site that looks enough like the original to trick you into buying phony merchandise or revealing your login and password. Every day, almost 1,000 Americans file some kind of identity-theft complaint with the U.S. Federal Trade Commission, and of them, about 750 report being scammed by an impostor.
That is one of the reasons hundreds of businesses, from Google to Wal-Mart, have paid $185,000 each to apply for the rights to Web domains that read, say, .google or .walmart. Companies buying these eponymous top-level domains from the Internet Corporation for Assigned Names and Numbers (Icann)—the nonprofit that runs distribution of domain names under the oversight of the U.S. Department of Commerce—will in theory be able to strictly limit who creates pages on them. Of the 1,930 applications for the new Internet real estate, 534 came from companies buying up their trademarks, according to Icann. Addresses that end in .com or .net will continue to be controlled by Reston, Virginia-based networking company Verisign.
Companies such as Chanel and Hermès say self-branded domains will help them combat the sale of counterfeit goods from imitation websites. “These sophisticated criminal activities cause reputational damage to businesses as Internet users lose consumer confidence and trust,” Chanel said in applying for .chanel. Companies filed applications in 2012, but contracts were not due until this past July, so most of these “not-coms” are not expected to roll out their new domains until later this year or next.
Barclays was an early mover, shifting its corporate home page from barclays.com to home.barclays in May. Troels Oerting, who heads the bank’s security, said in a statement announcing the move that the new domain should make it “crystal clear
to our customers that they are engaging with a genuine Barclays site.” The more important customer-login pages have not switched over yet, and the bank did not disclose a target date.
Unsurprisingly, banks are especially interested in private, branded Web domains. JPMorgan Chase is awaiting Icann approval for .jpmorgan, .chase, and .jpmorganchase. They have also joined more than 5,500 companies in applying for .bank addresses through fTLD Registry Services, an organization backed by the American Bankers Association and the Financial Services Roundtable that works to secure generic domain names for banks and insurers. This is a sort of middle ground between an eponymous domain name and a .com. These new dot-categories, including .coupons, .city, and .meme, leave some room for the speculators known as cybersquatters, who buy up addresses to sell later at a marked-up price, though the high application price tag should dissuade all but the most determined.
Companies are betting that operating their own domains will be more secure because they are directly in control of the security and maintenance. The catch, says Ken Westin, an analyst with cybersecurity company Tripwire, is that they will have to take more responsibility for oversight of their private domains than they did in Verisign’s dot-com world. “They’re more in control of their brand and potentially more in control of their own security,” he says, adding that companies will need to make sure their domains’ underlying network architectures are functional and secure, which they did not before.
It will take time to retrain customers who have been typing “.com” for 20 years to make the new addresses their defaults, says Westin, and the interim confusion could provide an opening to scammers. In any case, some of the Internet’s security problems cannot be solved with new URLs, acknowledges David Conrad, Icann’s chief technology officer. Targeted attacks such as those against Target and Home Depot focused on weak spots in the underlying networks, like credit card readers, he says. Icann’s own record on cybersecurity makes clear just how difficult it can be. The naming organization announced recently that its own website had been hacked and encrypted usernames, passwords, and e-mail addresses had been stolen.
Citations
1. http://bloom.bg/1EmKyW0 – Bloomberg
Homebuilder NVR Goes “Land Light” to Grow
Of all the industries to get hit hard by the financial crisis, America’s homebuilders may have been dealt the most crippling blow. Builders are still wrestling with the financial consequences of their decisions during the housing bubble, including the debt they amassed while gobbling up land.
But the nation’s fifth-biggest homebuilder sidestepped most of this drama. NVR, based in Reston, Va., operates with a “just-in-time” model unique in the industry, wherein the firm options, rather than buys, the land it intends to build on. That strategy has helped keep the firm’s balance sheet clean and its profit margins fat. “They’re the only builder that never lost money throughout the whole downturn,” notes Alex Barron, founder and senior research analyst of the Housing Research Center.
NVR sold roughly 12,400 homes in the past 12 months—up 8% from the year before and good for $4.65 billion in revenue. The company has benefited from healthy sales in the Washington, D.C., and Baltimore metro areas, where it has market share of 20% and 30%, respectively. That kind of superior market share is key to NVR’s “land-light” strategy. It is the leading builder in most markets where it operates (others include Pittsburgh and Philadelphia), which gives it the leverage to get developers to accept options rather than outright purchases. That, in turn, lets NVR avoid debt, explains Morningstar analyst James Krapfel.
NVR is unique in that it relies nearly entirely on options to secure its land (91% of controlled lots are optioned). NVR enters into option contracts that give it the right, but not the obligation, to take down finished lots at a predetermined price and pace. NVR attempts to structure its purchase agreements so that it takes ownership of the lots on a just-in-time basis, immediately prior to building a sold home. The only recourse against NVR is a nonrefundable cash deposit paid up-front that can range up to 10% of the full purchase price. This model has proved to be excellent throughout the cycle as invested capital stays low and the firm is able to walk away from or negotiate option contracts when land values plummet or the firm thinks it will not be profitable to build on such land. Cash flow generation and return on invested capital (ROIC) have been impressive; since 2002 free cash flows as percentage of sales and ROIC have averaged 8.4% and 47%, respectively, well ahead of other publicly held builders.
NVR’s aversion to debt may reflect a lesson learned. The company was formed when NVR Homes acquired Ryan Homes in a leveraged buyout in 1987. The debt load from that deal weighed down the company and helped drive NVR into Chapter 11 bankruptcy in 1990. Chairman Dwight Schar and current CEO Paul Saville, who succeeded Schar in 2005, were both with NVR during the ordeal.
Despite these eye-popping figures, there is little that prevents competitors from more heavily pursuing the finished lot options that NVR relies upon. The housing downturn hit developers particularly hard, somewhat constraining NVR’s ability to source land in its desired manner. This has even led NVR to take on a small amount of raw land to develop in early 2013.
There is a downside to a just-in-time strategy: Barron says NVR’s unwillingness to own land could put a modest damper on its profits if housing sales return to boom levels. But demographics are on the company’s side: Millennials, the largest generation in U.S. history, are reaching prime home-buying age—just in time, perhaps, to keep NVR’s momentum alive.
Citations
1. http://for.tn/1JqyXHI – Fortune
2. http://bit.ly/1Esxq22 – Morningstar
The Good News Is . . .
• A monthly homebuilder sentiment index from the National Association of Home Builders rose 1 point to 61, the highest level since November 2005. Any reading above 50 is considered positive. Of the index’s three components, buyer traffic increased 2 points to 45. Current sales conditions rose 1 point to 66, while sales expectations in the next six months held steady at 70. Regionally, based on a three-month moving average, homebuilder confidence in the West and Midwest each rose 3 points to 63 and 58, respectively. The South gained 2 points to 63 and the Northeast held steady at 46.
• Cisco Systems, Inc., a leading manufacturer of networking equipment and software, reported earnings of $0.59 per share, an increase of 7.3% over year earlier earnings of $0.55 per share. The firm’s earnings topped the consensus estimate of analysts by $0.03. The company reported revenues of $12.8 billion, a 3.9% increase. Management attributed the company’s results to a strong increase in deferred revenue from its software business.
• Schlumberger Ltd. is buying Cameron in a cash-and-stock deal valued at about $12.71 billion that would create an oil field equipment and service powerhouse. Cameron shareholders will receive 0.716 shares of Schlumberger common stock and a cash payment of $14.44 for each of their shares. The combined company had 2014 pro forma revenue of $59 billion. Cameron shareholders will own about 10% of Schlumberger’s outstanding stock.
Citations
1. http://bit.ly/1iaLwe9 – Natl. Assoc. of Homebuilders
2. http://cnb.cx/1gct3xa – CNBC
3. http://bit.ly/1JDWMdc – Cisco System, Inc.
4. http://on.wsj.com/1UcUO5a – Wall Street Journal
Planning Tips
Tips for Avoiding the Pitfalls of Apartment Shopping
More older Americans are choosing to downsize to apartments in vibrant urban areas. What you pay for your apartment and how fancy it is depends on your negotiation and deal-finding skills. However, before you negotiate anything, you have got to decide what you are looking for in your rented space. Below are some tips to help you find the apartment you want for the lowest possible rental rate.
Use the web to explore available features – If you do not know what features are available in your area, try exploring the websites of online apartment locator services. You can search for apartments based simply on whether you want a one- or two-bedroom apartment or by other features. It is a great way to find out both what your apartment will cost and what neighborhoods have the features you want.
Avoid choosing a home based on perceived value – You can get a great deal on an apartment with vaulted ceilings and an island kitchen, but the neighborhood may not be what you are looking for, or it may be missing other things that topped your list of desired features. Do not make the mistake of renting an apartment because it seems like a good deal according to someone else’s needs, but not a good deal based on your needs.
Call a locator in your area – Look online or in a physical phone book for numbers for apartment locators in your area. Call at least two and ask about which rental communities and neighborhoods have the most features that you want within your price range. Ask about specials. Because the locator will get a commission if you choose a property that he or she recommends, make sure the locator calls ahead to see if the two to three properties you like have the best units available.
Always call a community before visiting – Before you visit a property, call before visiting to get a quote on prices. Once you are on the property, the leasing agent may hope to wow you with features, but on the phone it is all about the numbers. Compare the figures you received from your locator with the number you gathered from online and other local apartment locator services.
Tour properties in person – While virtual tours can be found on most apartment complex websites, there is no substitute for visiting a community in person. Websites will provide an idea of what the community and interior look like, and should be used as an initial screen. Walking around your potential new neighborhood and apartment will give you a better feel for the location. Also, do not limit the search to one property; visit at least two, so that you have a comparison.
Citations
1. http://bit.ly/1C7ArzG – Bankrate.com
2. http://bit.ly/1kLnqaf – Investopedia
3. http://bit.ly/1FjcP9n – MoneyCrashers.com
4. http://on.mktw.net/1LKjuTh – Market Watch
5. http://bit.ly/1X0rEKN – Move.com
