Equity

Article Dean Dorton

Currently, home ownership comes with many tax-saving opportunities. Consider both deductions and exclusions when you’re filing your 2016 return and tax planning for 2017:

Property tax deduction. Property tax is generally fully deductible — unless you’re subject to the alternative minimum tax (AMT).

Mortgage interest deduction. You generally can deduct interest on up to a combined total of $1 million of mortgage debt incurred to purchase, build or improve your principal residence and a second residence. Points paid related to your principal residence also may be deductible.

Home equity debt interest deduction. Interest on home equity debt used for any purpose (debt limit of $100,000) may be deductible. But keep in mind that, if home equity debt isn’t used for home improvements, the interest isn’t deductible for AMT purposes.

Mortgage insurance premium deduction. This break expired December 31, 2016, but Congress might extend it.

Home office deduction. If your home office use meets certain tests, you generally can deduct a portion of your mortgage interest, property taxes, insurance, utilities and certain other expenses, and the depreciation allocable to the space. Or you may be able to use a simplified method for claiming the deduction.

Rental income exclusion. If you rent out all or a portion of your principal residence or second home for less than 15 days, you don’t have to report the income. But expenses directly associated with the rental, such as advertising and cleaning, won’t be deductible.

Home sale gain exclusion. When you sell your principal residence, you can exclude up to $250,000 ($500,000 for married couples filing jointly) of gain if you meet certain tests. Be aware that gain allocable to a period of “non-qualified” use generally isn’t excludable.

Debt forgiveness exclusion. This break for homeowners who received debt forgiveness in a foreclosure, short sale or mortgage workout for a principal residence expired December 31, 2016, but Congress might extend it.

The debt forgiveness exclusion and mortgage insurance premium deduction aren’t the only home-related breaks that might not be available in the future. There have been proposals to eliminate other breaks, such as the property tax deduction, as part of tax reform.

Whether such changes will be signed into law and, if so, when they’d go into effect is uncertain. Also keep in mind that additional rules and limits apply to these breaks. So contact us for information on the latest tax reform developments or which home-related breaks you’re eligible to claim.

Article Dean Dorton

As you close out 2015, take a look at the following key electric co-op performance indicators in Kentucky. Dean Dorton analyzed 11 of the larger electric co-op financial statements as provided to the Public Service Commission.

The industry looks stable with equity as a percentage of total assets climbing from 37% to 43% and an increase in current ratio from 1.18 to 1.25. Accounts receivable and accounts payable continue to turnover about every 12th day. Operating margin dipped from 6% to 5% and the group continues to reinvest in itself at the rate of 8% of revenue.

The industry is highly leveraged to fund its capital with debt exceeding its equity. The purchase of energy sits at 74% of revenue and represents one of the main risks going forward as highlighted in Dean Dorton’s top 10 electric co-op list for 2016.

2014

2013

Debt to equity

1.39

1.46

Equity to total assets

43%

37%

Current ratio

1.25

1.18

Accounts payable turnover

12.65

11.82

Accounts receivable turnover

12.59

12.82

Operating margin

5%

6%

Cost of purchase %

74%

74%

Plant additions %

8%

8%

 

For more information, contact Bill Kohm at bkohm@deandorton.com or 859-425-7625.


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Article Dean Dorton

You may have been interested in or may have contributed to funding campaigns on sites such as Kickstarter. There are a number of fundamental issues relating to crowdfunding – is your payment a gift to the fundee, an equity investment, a loan, or a purchase of an item? Funders don’t often think about these issues and the law isn’t always clear. Recently, the Securities and Exchange Commission (SEC) adopted final rules allowing private companies to sell securities (an equity investment) through internet-based crowdfunding. These rules will become effective on May 16, 2016 and will allow all investors (not just accredited investors) to buy private securities – i.e., to invest in crowdfunding ventures. There are limitations – see below:

  • The amount the company can raise through crowdfunding is limited to $1 million in any 12-month period.
  • If an individual investor’s annual income and net worth are both greater than $100,000, he can invest up to 10% of his net worth.
  • If an individual investor’s annual income or net worth is less than $100,000, he can invest the greater of $2,000 or 5% of his annual income or net worth.
  • Crowdfunding investors generally may not sell their securities for one year. Even without that limitation, crowdfunding investors should view their investments as highly illiquid.
  • Funding portals will be required to register with the SEC.
  • Those seeking this type of equity crowdfunding will be required to provide information about the offering and the financial condition of the company. These requirements are much less onerous than those associated with a public offering, but they are significant, and failure to comply may permit an unhappy investor to obtain a refund.

This is a significant improvement to the rules for small companies seeking to raise capital and for funders seeking an equity investment in such companies. We’re not sure if it will bring a sea-change in Kickstarter type fundraising and so the confusion about the nature of such contributions will likely continue – is it a gift, a loan, or a purchase of an item? If it’s an equity investment, it should comply with the new SEC rules.

Contact your Dean Dorton advisor if you have any questions or would like to learn more.