Category: Business

Happy Tax Day and welcome to the new world of Qualified Business Income

by philg

I think that 2018 will be remembered as the breaking point at which the federal tax code become too complex for anyone other than a full-time accountant to understand.

One of the brand new areas is the 20-percent discount for pass-through income from LLCs and S Corp. I think the goal of this is to prevent everyone from forming a C corporation and paying tax at the new corporate tax rate, then eventually taking money out via a dividend and paying tax at the qualified dividend rate (21 percent federal for the corporate tax, 20 percent for dividends, plus another 3.8 percent for Obamacare, plus whatever a state might charge (e.g., 13 percent for California)).

The 20 percent discount, however, is limited to something like the first $157,500 of income. So it is progressive! The mason or plumber gets the full discount while the business consultant probably won’t.

How can you tell how much tax you’re going to pay? You need to calculate the wages paid by the business and also “the unadjusted basis immediately after acquisition (UBIA) of qualified property held by the trade or business” and then plug those into a formula (IRS explanation):

A qualified trade or business is any trade or business, with two exceptions:

1.Specified service trade or business (SSTB), which includes a trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, dealing in certain assets or any trade or business where the principal asset is the reputation or skill of one or more of its employees. This exception only applies if a taxpayer’s taxable income exceeds $315,000 for a married couple filing a joint return, or $157,500 for all other taxpayers

2. Performing services as an employee

Q6. The SSTB limitation discussed in Q&A 5 does not apply if a taxpayer’s taxable income is below $315,000 for a married couple filing a joint return and $157,500 for all other taxpayers; the deduction is the lesser of:

A) 20 percent of the taxpayer’s QBI, plus 20 percent of the taxpayer’s qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income B) 20 percent of the taxpayer’s taxable income minus net capital gains.

If the taxpayer’s taxable income is above the $315,000/$157,500 thresholds, the deduction may be limited based on whether the business is an SSTB, the W-2 wages paid by the business and the unadjusted basis of certain property used by the business. These limitations are phased in for joint filers with taxable income between $315,000 and $415,000, and all other taxpayers with taxable income between $157,500 and $207,500. The threshold amounts and phase-in range are for tax-year 2018 and will be adjusted for inflation in subsequent years.

Got it? If so, please explain this to the rest of us!

(“Section 199A: unadjusted basis of qualified property” by an Arizona CPA is helpful. It says that you go back 10 years in calculating the value of property used, unless there is a longer applicable recovery period “under Sec. 168.”)

If your brain doesn’t explode from all of the paperwork, an accountant friend says that, due to the 20 percent discount, it always now makes sense to have an LLC or S Corp. (as opposed to a Schedule C sole proprietorship) if you’re going to be doing any kind of profitable business.

Separately, I have noticed a trend of Massachusetts friends and neighbors spending more time in Florida (or outright moving to Texas). Some of them will spend 1 day every four years voting virtuously for a Democrat, but 183 days every year living in Florida so as to skip out on the no-longer-deductible Massachusetts income tax.

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Now that the road network is useless, why aren’t subway system operators rich?

by philg

The other day I had to be in downtown Boston for a 9:00 am meeting. Our road network melted down circa 2005 and there is no way to know if a 20-mile trip from the suburbs will take 45 minutes, 1.5 hours or longer.

I decided to do the 15-minute drive to the Alewife parking garage, which required about 40 minutes when started at 7:30 am. As there was no way to know how long the next phase of the journey would be and I was going to fortify myself with a Dunkins coffee (sold right in the station, unlike other transit systems that try to discourage eating/drinking), it seemed a prudent time to use the restroom in the massive building (replacement cost $200 million?):

Note that at least one plumbing fixture and the only soap dispenser are missing.

This is where the trains start so I was able to get on and find a seat. At the first stop, Davis Square, enough people got on to completely fill the car:

Nobody could get on at Porter, Harvard, or Central. Only after some biotech slaves go out to stream into the new towers of Kendall Square did the train have enough room to accommodate folks waiting on the platforms. (I later learned that the pro tip for those commuting in from Porter or Harvard is to head outbound to Alewife first and then come inbound.)

I made it to my destination on time and was wrapped in an atmosphere of comparative calm:

(Of course, I criticized them for their cisgender-normative prejudice in assuming that it is only “mothers” who might want to use a room for feeding babies. See “Breastfeeding as a trans dad: ‘A baby doesn’t know what your pronouns are’” (Guardian), for example.)

As the monopoly owner of the only means of reasonably fast and reasonably reliable transport between 7 am and 7:30 pm in the Boston area, I would expect that the MBTA’s financial condition would improve every year as the roads deteriorate. Shouldn’t they be able to extract huge $$ from desperate riders? If they want to preserve the low-cost-but-can’t-get-on-the-train option they can do that at the current fare ($2.25 or $2.75 depending on how it is paid for; see https://philip.greenspun.com/blog/2018/01/09/our-local-public-transit-system-spends-more-than-a-year-of-revenue-on-cash-registers/). But they could also run VIP trains in between that cost $10/ride.

Subjectively it seems as though the trains are packed to the point where they couldn’t get a single additional rider on. Yet, from November 2018: “T notes: Ridership, even at peak times on Red Line, continues to decline”. Maybe they are running fewer trains per hour?

Readers: How is it possible that a system that has an amazing irreplaceable paid-for-100-years-ago asset (the tunnels) can’t be profitable in an environment of ever-worsening surface traffic jams?

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Evaluating trustworthiness; lessons from Theranos

by philg

From Bad Blood, the authoritative book on the rise and fall of Theranos.

[Jim Mattis, U.S. military hero and Theranos corporate board member] went out of his way to praise her integrity. “She has probably one of the most mature and well-honed sense of ethics—personal ethics, managerial ethics, business ethics, medical ethics that I’ve ever heard articulated,” the retired general gushed. Parloff didn’t end up using those quotes in his article, but the ringing endorsements he heard in interview after interview from the luminaries on Theranos’s board gave him confidence that Elizabeth was the real deal. He also liked to think of himself as a pretty good judge of character. After all, he’d dealt with his share of dishonest people over the years, having worked in a prison during law school and later writing at length about such fraudsters as the carpet-cleaning entrepreneur Barry Minkow and the lawyer Marc Dreier, both of whom went to prison for masterminding Ponzi schemes. Sure, Elizabeth had a secretive streak when it came to discussing certain specifics about her company, but he found her for the most part to be genuine and sincere. Since his angle was no longer the patent case, he didn’t bother to reach out to the Fuiszes.

Background: Roger Parloff, legal affairs reporter for Fortune, was intrigued by a story about Theranos hiring David Boies to sue a guy who had a patent that they would have needed to license if the blood testing machines had actually worked. Boies was given a fat slice of Theranos equity and a board seat in exchange for doing the company’s legal bidding. The author describes the lawsuit as entirely meritless, alleging that the inventor had somehow gotten hold of proprietary Theranos info because his son was a partner at the same huge law firm that had filed some patents for Theranos. The inventor spent $2 million on legal defense before caving in. (The big multi-office law firm’s records manager investigated the allegation and couldn’t find anything to suggest that the son/partner had ever accessed any Theranos-related information or even knew at the relevant time that the company was a client.)

The resulting puff piece hugely boosted the public profiles of Theranos and Elizabeth Holmes:

The story disclosed Theranos’s valuation for the first time as well as the fact that Elizabeth owned more than half of the company. There was also the now-familiar comparison to Steve Jobs and Bill Gates. This time it came not from George Shultz but from her old Stanford professor Channing Robertson. (Had Parloff read Robertson’s testimony in the Fuisz trial, he would have learned that Theranos was paying him $500,000 a year, ostensibly as a consultant.)

Elizabeth was also quick to embrace the trappings of fame. The Theranos security team grew to twenty people. Two bodyguards now drove her around in a black Audi A8 sedan. Their code name for her was “Eagle One.” (Sunny was “Eagle Two.”) The Audi had no license plates—another nod to Steve Jobs, who used to lease a new Mercedes every six months to avoid having plates. Elizabeth also had a personal chef who prepared her salads and green vegetable juices made of cucumber, parsley, kale, spinach, lettuce, and celery. And when she had to fly somewhere, it was in a private Gulfstream jet.

To me so far the strangest thing about the story is nobody questions the premise that sending every human for more frequent blood tests would result in healthier humans. Anyone who has ever had an encounter with the medical system knows that test results are generally inconclusive. What difference does it make if the doctor gets a result from a legacy Siemens machine that requires a venous draw or an amazing Theranos machine that requires only a pin stick.

Even if Theranos had succeeded technologically, I can’t figure out how it would have made people healthier.

Circling back to the above quote, this is a good reminder that humans are terrible at figuring out who is lying!

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Sizing a UPS for cable modem and router; market opportunity for a long duration low power UPS?

by philg

Things that our neighbors hate more than Donald Trump:

  • cell towers
  • underground power lines

Power failures are routine and, when they happen, we lose all communications capability (since a mobile phone won’t work inside the house and only barely works out in the yard).

I’m thinking it might be nice to back up our Verizon FiOS service, including the Internet. Then, in theory, we can at least use our landline and our smartphones or laptops that are charged.

A friend in town says that this is a fool’s errand: “when we had power failures, it turned out that the fiber switch on the street would go down.” On the other hand, this FiOS customer had 72 power outages with Internet in a 6-year period (great advertisement for U.S. infrastructure!).

I’m wondering how to size the UPS to run the latest ONT (corresponding to a cable modem) and VZ’s WiFi router. Verizon sells a ghetto backup battery system, just for the ONT (to run the landline for 24 hours), based on 12 D cell disposable batteries. Wikipedia says a D battery has 18 amp-hours of capacity at 1.5V, so the total of 12 would have 324 watt-hours?

If we assume that the WiFi router draws a similar amount, and will have both boxes plugged into a UPS, we therefore need a UPS with 650 watt-hours of battery? Add another 20 percent for the efficiency losses in converting from DC up to 120V AC down to DC, so now we need 800 watt-hours of battery inside the UPS to run for 24 hours?

It seems to be tough to find this information. UPS vendors spec them in volt-amps or watts and then bury the battery details. Also, maybe Verizon is selling its own thing because the appropriate product does not exist in the market? To get a beefy battery one needs to invest in crazy high max VA, which is irrelevant in this application. A $200 UPS rated at 1500 VA is backed by only two feeble $20 8.5 Ah 12V batteries (204 watt-hours; less than Verizon’s 12 D cells). We bought one to try out and it supplies the ONT and router for 2.5 hours, less than half as long as expected. The higher-capacity machines seem to be marketed as “generators” (without the generator!), e.g., this 412 Wh 11 lb. box for $550.

APC makes a box with a replaceable lithium ion battery for only about $71, which they say is intended to power routers, but it stores a pathetic 41 Wh. Lithium-ion is just not a sensible way to buy watt-hours, apparently.

Readers: Is there a market opportunity here? Apparently providing even the power of 12 D cells on a trickle-out basis is crazy expensive right now. How about a device that holds 24(!) D cell batteries and, in the event of a power failure, will supply power from those batteries to a router and ONT or cable modem? A brief interruption in the power supply is acceptable. Amazon sells D cell Energizer alkaline batteries for about $1 each, delivered. Instead of buying a $500 lith-ion battery that will be garbage after 3 years, just buy $24 of D cells every year or two.

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Shop from women-owned businesses at Amazon

by philg

A friend recently pointed out this feature from Amazon: “Shop women-run businesses”:

In a gender-fluid age, what does this mean? Can any enterprise in which an owner or manager clicks “I identify as a woman” be considered “women-run” as far as the Amazon database is concerned?

[Separately, I’m not sure that this works. I searched for “razor”, hoping to see if it was possible to purchase an anti-toxic masculinity Gillette product from a woman-owned business. The first option was to buy a Fusion 5 (my continued testing against the Dorco Pace 7 and Pace 6 Plus show that the Koreans make a superior product if performance, rather than politics, is the relevant measure) from Amazon itself. In what sense is Amazon “women-owned” or “women-run”?]

Things are simpler here in the Boston suburbs. From a coffee shop in Lexington today, “we source this coffee exclusively from women coffee farmers”:

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Asian-style guest linen rental for Asian-style U.S. cities?

by philg

The Life-Changing Magic of Tidying Up, by Marie Kondo, says not to store guest linens because they take up a lot of space relative to their infrequent use and they’ll smell like mildew after months in storage. Just rent them when guests show up, says Kondo, implying that the typical Japanese reader would find a convenient rental option nearby.

Via the magic of population growth and increased concentration of American economic activity in a handful of places, we’re building Asian-style cities (in terms of population density, if not infrastructure quality). An increasing percentage of Americans going forward will be living in minimum-size apartments.

Is there a business opportunity here? Offer a roll-out mattress and fresh linens for rent. Base the rentals at laundries that have the in-house capability to wash everything. Put a national brand name on it so that consumers know what quality to expect.

Readers: What do you think of this idea? It is apparently a sustainable business in Japan.

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Alexandria Ocasio-Cortez takes an anti-immigration position?

by philg

At lunch on Friday, a friend bragged a bit about his daughter, a whip-smart Computer Science graduate working for one of the most prestigious Wall Street banks: “She’s making a ton of money.”

Really, I asked. She won’t need a car in Manhattan so let’s say that she can spend half of her after-tax earnings on rent. Within a 20-minute walk of her office, how big of an apartment would she get? “Not even a one-bedroom,” he replied. The young energetic works-all-the-time college graduate has to share an apartment. So, she’d have an objectively higher standard of living if she were a programmer for the State of Indiana? “Yes.”

Let’s look at what happens when a big rich employer moves into this environment.

“Ocasio-Cortez and progressives score a victory in Amazon fight” (CNN):

Ocasio-Cortez hailed the Washington Post report on Friday as a victory of the citizen over the corporation, when she tweeted a link to the Post article and added: “Can everyday people come together and effectively organize against creeping overreach of one of the world’s biggest corporations? Yes, they can.”

Let’s also consider “Ocasio-Cortez leads immigration rally outside White House” (The Hill):

Rep. Alexandria Ocasio-Cortez (D-N.Y.) on Tuesday used a pro-immigration rally outside the White House to call for permanent residence for people in the U.S. with temporary protected status (TPS).

“We are a nation that turns peril into promise,” Ocasio-Cortez said. “We are here to make sure that all TPS recipients become permanent members of the United States of America.”

Also “ALEXANDRIA OCASIO-CORTEZ SHEDS TEAR, SAYS ‘WE ARE STANDING ON NATIVE LAND’ AS SHE CALLS TO DEFUND ICE” (NBC):

Representative Alexandria Ocasio-Cortez on Thursday called on Congress to cut funding to U.S. Immigration and Customs Enforcement (ICE) and accused the agency of criminalizing Latinos in the United States, which she called “native land.”

I wonder if everyone’s favorite member of Congress has figured out that the immigration of Amazon into Manhattan is likely to be a net negative for most of her constituents. Plainly, property owners will be better off. There will be more demand for office space, retail space, and apartments.

What about renters? Consider the school teacher, age 32, who has been working for NYC Public Schools since graduating college at age 22 and has earned an online master’s degree. If I’m reading the salary schedule right, this puts the teacher at $87,160 per year. If the teacher has no children, earning $87,160 is above the eligibility limit for public housing.

Why is the teacher better off after Amazon moves in? The teacher’s salary is set by union contract and won’t go up. Amazon was forecast to pay an average of $150,000 per year. This is great news for the teacher’s landlord, who now has 25,000+ new potential renters earning $150,000 per year. Why is it great news for the teacher?

If we consider the teacher a “native” and the Amazon workers “immigrants,” I wonder if this is the same situation as the immigration question on which Ms. Ocasio-Cortez takes the opposite view.

An extra 50 or 100 million immigrants plus children of immigrants is wonderful news for property owners (the government will pay to rent a migrant family an apartment), the health care industry (more customers and the government will pay for nearly all of them!), folks who work in the welfare industry, etc. But for a renter with low skills, the immigrants will drive up the cost of an apartment and drive down the market-clearing wage.

Readers: Is Alexandria Ocasio-Cortez being inconsistent here in advocating for migrants to come through the southern border and for Amazon to stay out of Queens? Does the own vs. rent dichotomy explain most of the disagreement in New York City on whether Amazon HQ2 was a positive or a negative?

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Theranos was an immigration and H-1B story

by philg

Bad Blood, the authoritative book on the rise and fall of Theranos, describes American- and British-born engineers and scientists being fired for saying “the goal is too ambitious” or quitting when realizing this. Who replaced them? According to the book, almost all immigrants from India, either folks who’d recently completed a degree in the U.S. or coming over on H-1B visas, all managed by Ramesh Balwani, Elizabeth Holmes’s boyfriend.

During the “grand fraud” stage of Theranos, therefore, it was a primarily immigrant show except for the young impresaria.

[I’m going to guess that neither Mr. Balwani nor any of these engineers and scientists make it into the children’s book First Generation: 36 Trailblazing Immigrants and Refugees Who Make America Great…]

The money to fuel the craziness of Theranos seems to have been all domestic. Walgreen’s kicked in $100 million(!) as an “innovation fee” and then loaned the company another $40 million, according to the book. The credulous yet imperial CEO Steve Burd (Wikipedia shows him hanging out with Barack Obama) drained huge amounts of Safeway shareholder cash to help Theranos. The idea in both cases was that Theranos devices were supposed to be placed in these retailers’ stores.

If the end result is a tech staff that is mostly Indian, I wonder if the Silicon Valley location makes sense. Why not have all of the engineers and scientists work from Bangalore or Delhi? Instead of 8 people sharing a two-bedroom apartment in Menlo Park, each of those 8 workers can enjoy his or her own comfortable house (rent for a 3BR apartment in the center of Bangalore is about $570/month (source), 1/10th the price of Menlo Park (source)). What’s the advantage of bringing H-1B slaves over to toil on a Silicon Valley plantation compared to running the tech farm in India?

(Another interesting aspect of the book is learning just how much room there is for human error in traditional medical lab tests, e.g., in the handling of reagents. Elizabeth Holmes was not wrong in thinking that a fully automated process could potentially be more reliable.)

Related:

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Slide Rule by Nevil Shute

by philg

A reader was kind enough to give me a hardcopy(!) version of Slide Rule by Nevil Shute. It turns out that the popular novelist was an aeronautical engineer during the golden age of aviation. One of the luxuries of getting in on the early days was working with two of the greats: Geoffrey de Havilland and Barnes Wallis, of Dambusters fame.

Shute says that “the halcyon period … died with the second world war when aeroplanes had grown too costly and too complicated for individuals to build or even to operate.” Those are fighting words at Oshkosh and I think that Game Composites refutes this gloomy perspective to some extent (albeit one of the “individuals” had to be a Walmart heir!).

Shute was an airship designer at a time when a government-run operation was building the R101 (crashed and burned due to incompetence, according to Shute) in competition with the R100, a private effort. I still can’t figure out how airships ever worked. The R100 made it to Canada and back, but got kicked up 4,000 fpm in a light thunderstorm. The British airship industry was doomed by the crash of the R101 and improvements in heavier-than-air planes, but I don’t know why anyone thought that it would ever be practical given the power of Nature and the inability of an airship to outrun a storm.

Social norms were different between the Wars. Shute describes a “married woman living apart from her husband, who established herself in the village while her divorce matured.” Her sexual relationship with one of his bachelor test pilots results in an uprising by the “Wives Trades Union of Yorkshire,” upset that they might have to encounter “that woman.” (see Real World Divorce for how things have changed for the better, from a plaintiff’s perspective, in England!) Shute says that he prefers a married-with-children test pilot who will bring back a prototype at the first sign of trouble.

Airship aviation is an indoor/outdoor experience. Crew members are able to walk on top of the ship, move around outside to make repairs while the airship is flying, go to sleep in a cabin, etc. The weather has to be crazy bad before there is anything that could be called “turbulence” to disturb passengers.

The book covers topics that would be familiar today to anyone involved in startups: raising money and growing a business despite a shortage of capital. Shute co-founded an airplane manufacturer called Airspeed Ltd. in 1931 (i.e., during the Great Depression). Despite an industry that grew as fast as hoped, a war that resulted in huge demand from governments around the world, and thousands of airplanes produced and flown away by customers, the company never thrived financially and was eventually absorbed into de Havilland. A cautionary tale for those who today would try to make money on self-driving cars, electric cars, solar power, or any other obviously booming technology. Shute’s Airspeed simply couldn’t make a significant profit in the face of competition from higher-volume manufacturers that kept reducing their unit costs. The Royal Family bought an Airspeed Envoy, but that still wasn’t enough to stave off the competition.

Shute is eventually pushed out (1938), which he says in retrospect was a smart decision: “I would divide the senior executives of the engineering world into two categories, the starters and the runners, the men with a creative instinct who can start a new venture and the men who can run it to make it show a profit. They are very seldom combined in the same person. … I was a starter and useless as a runner…”

So… to Wes: thanks! to everyone else: read Slide Rule if you’re interested in aviation, engineering, or entrepreneurship.

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