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Recently, one of my colleagues took me aside and asked what I could do to help a 40-year-old client who sold his business last year for $40 million. He wanted to shelter the proceeds from capital gains taxes and possibly fund a trust for his family. We both already knew that the opportunity to reduce the tax recognition on the capital gain had long passed.
Had he sought our advice long before he was committed to the sale of this business, we could have explored some valuable options. Here are two of them.
One option our client may have considered is to investigate qualifying his business for Small Business Stock treatment under Section 1202 of the Internal Revenue Code (IRC). Section 1202 was added through the 1993 Revenue Reconciliation Act to encourage small business investment. A Qualified Small Business (QSB) is any active domestic C corporation engaged in certain business activities whose assets have a fair market value of not more than $50 million on or immediately after the original issuance of stock, regardless of any subsequent appreciation (IRC § 1202 (d)(1)).
Qualified Small Business Stock that is issued after Aug. 10, 1993, and held for at least five years before it is sold may be partially or wholly exempt from federal capital gains taxes on the value of the shares sold, up to the greater of $10 million in eligible gain or 10 times the aggregate cost basis in the shares sold in each tax year (IRC § 1202 (b)(1)). Be aware that this limitation applies to each separate shareholder, and a trust, or multiple trusts, established and funded with QSB Stock gifted by a qualified QSB shareholder may enable much more than $10 million in gain exclusion. For QSB shares acquired after Sept. 27, 2010, the capital gain exclusion percentage is 100%, and it is excluded from alternative minimum taxes and the net investment income tax with the same five-year holding requirement (IRC § 1202 (a)(4)).
But only certain types of companies fall under the category of a QSB. To be a QSB, the domestic corporation must engage in a âQualified Trade or Businessâ (QTB). Such a business will generally manufacture or sell products, as opposed to providing services and expertise. Businesses that generally will not qualify are those offering services in health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, banking and insurance, as well as hospitality businesses such as hotels and restaurants (IRC § 1202 (e)(3)).
To qualify and continue as a QSB, the business must follow certain rules (there are many, and these are the most basic): It must be a domestic C corporation when the stock is issued and when sold, and at least 80% of its assets must be used in the active conduct of one or more QTBs during substantially the entire five-year holding period. If the business is already an LLC or S corporation, it may still qualify if the business reorganizes and revokes the subchapter S election and issues new stock in the C corporation, then meets the holding period before selling.
It is critical that management of the company understands all of IRC Section 1202âs requirements and agrees to maintain the business in a manner that continues to satisfy the active business requirement and the asset investment limitations, and avoid the pitfalls related to stock redemptions, tax elections and conversions.
To summarize, in order for the QSB shareholder to claim the tax benefits upon sale, the following must apply: The shareholder may be a person or business not organized as a C-Corp; the QSB stock must be original issue and not purchased in trade for other stock; the shareholder must hold the QSB stock for at least five years; and the QSB issuing the stock must devote more than 80% of its assets toward the operation or one or more QTBs.
Most states conform to the QSB stock exclusion and also exclude capital gains tax on QSB stock when sold as required in IRC § 1202. The exceptions are California, Mississippi, Alabama, Pennsylvania, New Jersey, Puerto Rico, Hawaii and Massachusetts. If you live in one of those states, you may want to consider a concurrent trust strategy described below to eliminate all capital gains taxes on the sale of QSB stock. But even in conforming states, the QSB shareholder can claim additional exclusions greater than the $10 million exclusion limitation by gifting into multiple trusts so all the possible gain from the sale is excluded.
Shareholders living in a nonconforming state or expecting an aggregate capital gain much greater than the $10 million cap may use a Tennessee Income Non-Grantor Trust (TING) to eliminate all federal and state taxation on the sale of the QSB stock gifted to the TING prior to an agreement to sell. Tennessee law enables a person who owns a highly appreciated asset, like QSB stock, to reduce or eliminate his resident state capital gains taxes on the sale of the QSB stock through a TING. While several other states also have laws that support this strategy, Tennessee legislators have adopted the best parts of other statesâ laws. To be clear, a taxpayer already living in a state with no state income tax may use resident state trusts to spread the capital gain resulting from the sale of QSB Stock.
The grantor will gift the QSB stock to one or more TINGs (a gift of QSB stock is an exception to the original issue rule under IRC § 1202 (h)(2) and the five-year holding period is not interrupted by a gift to a trust under IRC § 1202 (h)(1)). The trustee may then sell the QSB stock in a manner that allows treatment as a long-term capital gain. If the TING makes no distributions in the tax year in which the QSB stock meeting all the requirements is sold, the sale will be excluded from federal and state capital gain recognition.
The clientâs resident state may seek to tax at least some of the income of a nonresident TING if the clientâs resident state has a close interest in the trustâs assets, such as through real property located in or a business operating in that state. This is known as the Sourced Income Rule. Some states think they have a sufficient connection to levy a tax on a nonresident trust simply because the settlor or a beneficiary of the trust lives in that state, or the trustee has an office in that state. That broad application of the definition of a resident trust may be misplaced, but many of our clients want to avoid any expense from litigating against a state taxing authority.
However, if the tax savings are substantial, then a client considering a TING should be aware that the Supreme Court has unanimously ruled that the state of North Carolina overstepped its taxing authority when it sought to tax trust income based solely on the residence of a trust beneficiary. North Carolina argued that its taxing authority included any trust income that âis for the benefit ofâ a state resident. The Supreme Court disagreed and ruled in the case of North Carolina Department of Revenue v. The Kimberley Rice Kaestner 1992 Family Trust âthat the presence of in-state beneficiaries alone does not empower a state to tax trust income that has not been distributed to the beneficiaries where the beneficiaries have no right to demand that income and are uncertain ever to receive it.â This ruling may serve to restrain other state taxing authorities from applying an overly broad application of their resident trust rule.
Both of these strategies used together can be highly beneficial for a QSB shareholder living in a QSB nonconforming state or one who expects the total capital gain from a sale to exceed the $10 million cap on a QSB capital gain exclusion. However, these strategies also require that the QSB management and the QSB shareholder plan many years ahead of any contemplated sale.
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First-quarter earnings season keeps rolling on. Headlining this week’s earnings calendar will be entertainment giant Walt Disney (DIS, $110.71), oil name Occidental Petroleum (OXY, $62.97) and buy now, pay later company Affirm Holdings (AFRM, $25.04).
Through April 29, the percentage of S&P 500 companies reporting higher-than-expected earnings per share (80%) is above the five-year average (77%). However, the magnitude of the earnings beats (3.4%) is below the five-year average (8.9%), according to John Butters, senior earnings analyst at FactSet.
At the sector level, Butters says industrials and consumer staples have had the highest percentage of earnings beats at 91% and 89%, respectively. At the low end, real estate and consumer discretionary have the smallest amount of companies reporting earnings above estimates at 63% apiece.
Walt Disney will report its fiscal second-quarter earnings results after the May 11 close.
It has been a rough stretch for the Dow Jones stock, which is off more than 28% for the year-to-date, but another well-received earnings report could give DIS a boost.
In February, shares popped more than 3% after the company reported higher-than-expected earnings, revenue and Disney+ subscriptions.
Disney’s streaming service will be in focus this time around too, especially after Netflix (NFLX) stock sold off sharply when its latest earnings report showed the company’s first quarterly subscriber loss since 2011. However, unlike NFLX, Walt Disney “can monetize content through a variety of other channels, like merchandise and theme park revenue,” says David Trainer, CEO of Nashville-based investment research firm New Constructs.
And in addition to direct-to-consumer subscriber growth across Disney+, Hulu and ESPN+, which will help DIS stock outperform its peers, BofA Global Research analyst Jessica Reif Ehrlich says the company’s theme parks are on the upswing.Â
“Despite achieving near record results in its fiscal first quarter, international visitors still represent a minimal percentage of total attendance, hotel room occupancy remains well below peak levels as all hotels have not been reopened yet, cruise ship capacity remains below pre-pandemic peaks and parks are still operating below peak capacity levels,” Reif writes in a note to clients. “These should all be additional tailwinds over the next 18-24 months.”
As for Disney’s fiscal second quarter, consensus estimates are for earnings per share (EPS) of $1.06, up 34.2% year-over-year (YoY) and revenue of $18.8 billion (+20.1% YoY).
Occidental Petroleum has been in the limelight in recent weeks following news that Warren Buffett’s Berkshire Hathaway (BRK.B) increased its stake in the energy stock.Â
OXY first became a member of the Berkshire Hathaway equity portfolio in 2019, but the holding company more recently bought 91 million shares amid Buffett’s big spending spree.
The integrated oil and gas company will once again be in the spotlight when it unveils its first-quarter earnings results after Tuesday’s close.
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OXY ended 2021 in a strong position, returning to profitability on an annual basis after two years of losses and recording its highest free cash flow â or the money available after a company has met its financial obligations â ever.
The company no longer resembles the debt-ridden firm of fiscal 2020 following its “record-shattering fiscal 2021,” says Raymond James analyst John Freeman (Strong Buy).Â
“Leverage, which stood at around 4.8x at year-end 2020 â nearly double the Raymond James large-cap average â is estimated to fall below 1x by year-end 2022. The company, who remains completely unhedged in fiscal 2022, stands to generate a whopping $12.3 billion in free cash flow on our estimates of production of around 1.6 millions of barrels of oil equivalent per day (in-line with Street),” Freeman adds.
Underscoring this financial strength, analysts, on average, are expecting OXY to report earnings of $2.03 per share in Q1 versus a per-share loss of 15 cents in the year-ago period. Revenue is projected to jump 47.3% to $8.1 billion.
Affirm Holdings has not been immune to broad-market troubles in 2022, with shares down more than 75% for the year-to-date.
The reaction to the buy now, pay later (BNPL) stock’s mid-February earnings report â where AFRM shares slid nearly 21% the day after the results were released â only exacerbated these headwinds.
“AFRM has been pressured since reporting fiscal second-quarter results,” says Truist Securities analyst Andrew Jeffrey. This, according to Jeffrey, is due to a general multiple contraction, liquidity concerns and the perception of rising competition.Â
However, the analyst, who has a Buy rating on AFRM stock, isn’t worried. While the recent selloff creates an opportunity, “rising BNPL demand, driven by changing consumer demographics and tastes, creates opportunity for several providers.” And secular demand for BNPL “will outpace any cyclical headwinds.”
So what’s in store for Affirm’s fiscal third-quarter earnings report, due out after Thursday’s close?
Consensus estimates are for the company to record a per-share loss of 53 cents for the three-month period, an improvement over the $1.06 per-share loss it reported in the year-ago period. Revenue, meanwhile, is expected to climb 73.6% YoY to $344.0 million.
First-quarter earnings season keeps rolling on. Headlining this week’s earnings calendar will be entertainment giant Walt Disney (DIS, $110.71), oil name Occidental Petroleum (OXY, $62.97) and buy now, pay later company Affirm Holdings (AFRM, $25.04).
Through April 29, the percentage of S&P 500 companies reporting higher-than-expected earnings per share (80%) is above the five-year average (77%). However, the magnitude of the earnings beats (3.4%) is below the five-year average (8.9%), according to John Butters, senior earnings analyst at FactSet.
At the sector level, Butters says industrials and consumer staples have had the highest percentage of earnings beats at 91% and 89%, respectively. At the low end, real estate and consumer discretionary have the smallest amount of companies reporting earnings above estimates at 63% apiece.
Walt Disney will report its fiscal second-quarter earnings results after the May 11 close.
It has been a rough stretch for the Dow Jones stock, which is off more than 28% for the year-to-date, but another well-received earnings report could give DIS a boost.
In February, shares popped more than 3% after the company reported higher-than-expected earnings, revenue and Disney+ subscriptions.
Disney’s streaming service will be in focus this time around too, especially after Netflix (NFLX) stock sold off sharply when its latest earnings report showed the company’s first quarterly subscriber loss since 2011. However, unlike NFLX, Walt Disney “can monetize content through a variety of other channels, like merchandise and theme park revenue,” says David Trainer, CEO of Nashville-based investment research firm New Constructs.
And in addition to direct-to-consumer subscriber growth across Disney+, Hulu and ESPN+, which will help DIS stock outperform its peers, BofA Global Research analyst Jessica Reif Ehrlich says the company’s theme parks are on the upswing.Â
“Despite achieving near record results in its fiscal first quarter, international visitors still represent a minimal percentage of total attendance, hotel room occupancy remains well below peak levels as all hotels have not been reopened yet, cruise ship capacity remains below pre-pandemic peaks and parks are still operating below peak capacity levels,” Reif writes in a note to clients. “These should all be additional tailwinds over the next 18-24 months.”
As for Disney’s fiscal second quarter, consensus estimates are for earnings per share (EPS) of $1.06, up 34.2% year-over-year (YoY) and revenue of $18.8 billion (+20.1% YoY).
Occidental Petroleum has been in the limelight in recent weeks following news that Warren Buffett’s Berkshire Hathaway (BRK.B) increased its stake in the energy stock.Â
OXY first became a member of the Berkshire Hathaway equity portfolio in 2019, but the holding company more recently bought 91 million shares amid Buffett’s big spending spree.
The integrated oil and gas company will once again be in the spotlight when it unveils its first-quarter earnings results after Tuesday’s close.
Sign up for Kiplinger’s FREE Investing Weekly e-letter for stock, ETF and mutual fund recommendations, and other investing advice.
OXY ended 2021 in a strong position, returning to profitability on an annual basis after two years of losses and recording its highest free cash flow â or the money available after a company has met its financial obligations â ever.
The company no longer resembles the debt-ridden firm of fiscal 2020 following its “record-shattering fiscal 2021,” says Raymond James analyst John Freeman (Strong Buy).Â
“Leverage, which stood at around 4.8x at year-end 2020 â nearly double the Raymond James large-cap average â is estimated to fall below 1x by year-end 2022. The company, who remains completely unhedged in fiscal 2022, stands to generate a whopping $12.3 billion in free cash flow on our estimates of production of around 1.6 millions of barrels of oil equivalent per day (in-line with Street),” Freeman adds.
Underscoring this financial strength, analysts, on average, are expecting OXY to report earnings of $2.03 per share in Q1 versus a per-share loss of 15 cents in the year-ago period. Revenue is projected to jump 47.3% to $8.1 billion.
Affirm Holdings has not been immune to broad-market troubles in 2022, with shares down more than 75% for the year-to-date.
The reaction to the buy now, pay later (BNPL) stock’s mid-February earnings report â where AFRM shares slid nearly 21% the day after the results were released â only exacerbated these headwinds.
“AFRM has been pressured since reporting fiscal second-quarter results,” says Truist Securities analyst Andrew Jeffrey. This, according to Jeffrey, is due to a general multiple contraction, liquidity concerns and the perception of rising competition.Â
However, the analyst, who has a Buy rating on AFRM stock, isn’t worried. While the recent selloff creates an opportunity, “rising BNPL demand, driven by changing consumer demographics and tastes, creates opportunity for several providers.” And secular demand for BNPL “will outpace any cyclical headwinds.”
So what’s in store for Affirm’s fiscal third-quarter earnings report, due out after Thursday’s close?
Consensus estimates are for the company to record a per-share loss of 53 cents for the three-month period, an improvement over the $1.06 per-share loss it reported in the year-ago period. Revenue, meanwhile, is expected to climb 73.6% YoY to $344.0 million.
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This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.
In 2022, the old rules of investing have mostly gone out the window, but one thing hasn’t changed: Wall Street’s best value stocks continue to be an attractive place for investors to plunk down their money for the long term.
The S&P 500 is down roughly 10% year-to-date. War continues to rage in Ukraine and disrupt energy markets. And significant changes in interest-rate policy continue to upend investment strategies that have been profitable for several years running.
But that’s the thing about investing. If you want to get ahead, it’s important to think beyond the obvious opportunities and consider a holistic approach that will generate returns even in even challenging environments. That involves looking beyond fashionable growth investments to value stocks that might been roughed up of late but still offer long-term upside.
In hopes of finding the best value stocks for investors right now, we looked for:
A few of these companies have admittedly seen trouble lately, hence their sagging stock prices, but even then, their underlying businesses are sound. And considering the broader challenges to every company on Wall Street, it’s important for investors to focus on high-quality picks over the latest flashy growth narrative, regardless of recent performance.
Here are 15 of the best value stocks to buy now.
Share prices and other market data as of April 25. Analyst ratings courtesy of S&P Global Market Intelligence. Stocks are listed by analysts’ consensus recommendation, from highest score (worst) to lowest (best).
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This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.
(Reposting 3/30/22 as the Virgin Red partner is now live) A few bits of news out of Capital One today which we heard from our contact there: The Venture X signup bonus of 100,000 + $200 will be valid until March 14th. We don’t know what will be beyond that. In the coming weeks Virgin […]