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Tale of Two Cities

Connecticut has had its share of economic challenges in recent years, including a slow but steady outmigration of residents. Many might not be aware, however, of how stark the differences are between Connecticut and Massachusetts when it comes to long-term job recovery from the Great Recession — including Springfield’s relative strength when compared to Hartford. Farmington Bank’s economic adviser recently broke down the numbers, painting a picture that should be encouraging to those north of the border.

As an economic adviser for Farmington Bank, Don Klepper-Smith spends most of his analytical energy on Connecticut, but when he compares that state’s recent performance with its neighbor to the north, the numbers are stark.

“When we talk about Springfield and Hartford, I think the analogy ‘tale of two cities’ is appropriate,” Klepper-Smith said during a recent Farmington Bank webinar on the national and regional economy.

Since the low point of the Great Recession in 2009 — when unemployment spiked across the U.S. before the gradual recovery kicked in — the Greater Springfield area has created 32,000 new jobs, while Greater Hartford has created 37,000.

“So you’ve got close to 70,000 new jobs in the I-91 corridor between these two areas,” he noted. That’s all good. “But when we look at them in the context of our job-recovery rate, you can see Springfield is clearly outperforming Hartford — and looking a lot like the nation.”

The key takeaway is how much of the 2008-09 job losses have returned, he explained, and that’s where Springfield has really outpaced Hartford. While Hartford is now 4,200 jobs above full recovery — that is, above where the job picture stood in March 2008, before the economy collapsed — Springfield is 16,600 jobs above that line. To put it another way, Hartford has recovered 112.7% of its recession-era job losses, while Springfield has recovered 209.2%, gaining back its losses more than twice over. The national recovery figure, by the way, is 217.8%.

“When I think of Springfield, two words that come to mind are ‘stellar performance,’ with a job recovery rate that’s about twice that of Hartford,” Klepper-Smith said. “I think Hartford has its own challenges. We know the fiscal situation there has been tenuous, but I think economic-development policies are the reasons why Springfield is doing as well as it is.”

That’s good news for Springfield, which has been on a hot streak of good economic news for some time now, with the MGM Springfield casino at the forefront of that. But the numbers also reflect an overall disconnect in the way Massachusetts and Connecticut have respectively recovered from the economic downturn of a decade ago — and it’s a striking gap.

Tale of Two States

It’s hard to believe, Klepper-Smith says, that the U.S. recovery from the trough of the recession is now nine years old.

“The average postwar recovery is five years, so we’re getting a little bit long in the tooth here, and we’re looking for what could go wrong and trying to keep a positive attitude as we move through the balance of the year,” he went on. “Looking at the tea leaves and looking at the fundamentals, I’d say there’s a two in three chance we go forward with positive but slower economic growth — in the 2% to 2.5% range.”

Don Klepper-Smith

Don Klepper-Smith says economic-development policies have contributed to Springfield’s recent successes.

Yet, Connecticut continues to struggle — in fact, Hartford is among its strongest metropolitan areas in job growth, putting the rest of the state into stark relief. “State budget issues have undermined business confidence and promoted outmigration,” Klepper-Smith said, noting that the Nutmeg State has been shedding 428 people per week on average to other states.

“But as we go forward,” he said, “it boils down to consumers. Right now, what are consumers going to be doing for rest of 2018?”

Consumer confidence is rooted firmly in job creation, he was quick to note on more than one occasion. And Massachusetts job creation has been running circles around its southerly neighbor for much of the past decade.

Let’s go back to job-recovery rates, this time on the state level. Connecticut peaked at 1,713,000 jobs in March 2008, dropped to 1,594,000 by the following year — a 7% erosion — and has returned to a level of 1,687,000 jobs. That’s a recovery rate of just 78%, far below any other New England state.

“We seem to be stuck in this 80% range for job recovery, and right now we’re the only state in New England not to see full job recovery,” Klepper-Smith said of Connecticut. “I’ll be honest: I don’t see that number going above 100% any time soon. I don’t see robust job growth materializing any time soon.”

Massachusetts, in contrast, has been a model of recovery. From a 3,331,000 peak in 2008, the Bay State fell to 3,191,000 jobs at its 2009 trough — a 4.2% erosion — but now stands at 3,645,000, a whopping 322% recovery rate.

“In Connecticut, I’d have to use the word ‘lackluster’ for job recovery,” Klepper-Smith said, projecting that state likely won’t reach full recovery until 2020, several years after Massachusetts did so multiple times over.

The good news locally, he said, is that the Knowledge Corridor — the amorphous region stretching from Greater Hartford to Hampshire County — is doing well, even on the Connecticut side.

“We’ve got varying degrees of both strength and weakness. What we can say is the regional economy in the I-91 corridor is clearly performing well,” he noted, adding that the total non-farm job-growth rate is currently 0.8% in Hartford and 1.2% in Springfield, while the national figure is 1.6%. Again, Hartford pales in that comparison, but it’s behind only Danbury (1.0%) among Connecticut’s metro areas.

“I think the Connecticut economy seems to be moving sideways more than anything else, with pockets of both strength and weakness. We’re seeing signs of decelerating in many of the economic metrics we have,” Klepper-Smith said, noting that Connecticut’s gross state product ranks 49th nationally, ahead of only Louisiana.

“I’m hoping we can make some progress there as we move into 2019. We’re underperforming in job growth and income creation — and job growth will be what it’s all about. Jobs, jobs, jobs — they’re so important because of income, spending confidence, tax revenue, and all those linkages.”

National Picture

Nationally, Klepper-Smith said, the U.S. continues on a moderately positive path, growing at a seasonally adjusted annual rate of about 2.2%, though inflation — and rising costs of gas, healthcare, and home prices — are a concern.

“One of the things we can all agree on is that there are some pros and cons of living in an interconnected global economy,” he said. “And in economics, there are always tradeoffs; there’s never really a sense of clear winners and losers. Sometimes we have to wait and see how that all shakes out.

“But what we do know is what’s going on with the consumer sector,” he went on. “Consumers are so important to what’s going on because personal consumption accounts for roughly two-thirds of real gross domestic product.”

On one hand, he said, consumer-confidence measurables are strong — up 8% from last year and approaching 1990s levels, which is encouraging. But that trend could be tripped up by any number of factors.

“What we do know is that consumer fundamentals are being pressured, and risks to the current business expansion are becoming imperiled with rising energy prices, higher interest rates, and the expectation of higher healthcare costs heading into 2019. I think that’s a table setter for where we are, with the consumer feeling a little more squeezed and a little less comfortable compared to where we were back in March.”

Klepper-Smith expects the Fed to move with caution for the rest of the year. “We can now say the Fed sees rising inflationary pressures, and I honestly don’t feel they’re going to be aggressive on rate increases going forward. We’re probably not looking at more than two rate increases for the balance of 2018.”

If there’s one indicator to watch closely through the rest of the year, he said, it is, quite simply, how are consumers feeling? “One of the factors is the fact that the labor markets themselves have not shown meaningful progress. What that means is that we have not seen meaningful growth in consumer spending power.

“People ask me, ‘why doesn’t this feel like economic recovery the way I understood it in the past?’” he went on. “The answer is that we haven’t seen robust growth in consumer spending power.”

Back to Work

That comes down to jobs, of course, and Klepper-Smith admitted his dampened enthusiasm is mainly due to what he sees in Connecticut — which, again, puts Massachusetts in a very good light when it comes to its continuing recovery and expansion after the Great Recession.

“The good news is that we’ve seen job recovery in both regions, but I think that the problems that we have in Hartford are a bit more pronounced on the fiscal side, and I don’t think they’ll be going away any time soon,” he concluded.

It’s a sobering reflection of the myriad factors at play in creating an economic outlook — and a reminder that, even on the most challenging days in Massachusetts, things could be a lot worse.

Joseph Bednar can be reached at [email protected]

Banking and Financial Services

Take Caution with Section 199A

By Kristina Drzal Houghton, CPA, MST

Kristina Drzal Houghton

Kristina Drzal Houghton

On Dec. 22, 2017, the Tax Cuts and Jobs Act was signed into law, bringing the biggest changes to both corporations and individuals in the past 30 years. Having spoken before groups of medical professionals on this issue, I have found that many believe limitations in the law will prohibit physicians from benefiting from these tax reductions.

This article will focus on medical practices and highlight some techniques available to benefit from the 20% deduction which might otherwise be limited. Additionally, there will be detailed examples of said techniques that will help to provide perspective and clarity to practice owners and shareholders on this very complicated tax issue.

Over the past few decades, many practices have been formed as pass-through entities. In contrast to C-corporations, income earned by a sole proprietorship, S-corporation, or partnership is subject to only a single level of tax. There is generally no tax at the entity level; instead, owners of these businesses report their share of the business’ income directly on their tax return and pay the corresponding tax at ordinary rates.

The Tax Cuts and Jobs Act, signed into law this past December, reduced the top rate on ordinary income of individuals from 39.6% to 37%, and Section 199A further reduced the effective top rate on qualified business income earned by owners of sole proprietorships, S-corporations, and partnerships to 29.6%. Section 199A allows taxpayers other than corporations a deduction of 20% of qualified business income (QBI) earned in a qualified trade or business, subject to certain limitations.

Business owners below the applicable threshold amount — which is $157,500 of taxable income for all filers except joint filers, and $315,000 for those filing jointly —— can enjoy a QBI deduction for the lesser of 20% of their qualified business income or 20% of their taxable income. It does not matter what type of business is generating the income, nor is there a need to analyze W-2 wages paid by the business or depreciable assets owned by the business. The QBI deduction is what it is.

Business owners over their applicable threshold who derive their income from a business that is not a specialized trade or service business may also have their QBI deduction at least partially phased out, but the full deduction may be ‘saved’ based on how much they pay in W-2 wages and/or how much depreciable property they have in the business.

Business owners over their applicable threshold who derive their income from a ‘specified service’ business — which includes doctors, lawyers, CPAs, financial advisors, athletes, musicians, and any business in which the principal asset of the business is the skill or reputation of one or more of its employees — will have their QBI deduction phased out.

The phaseout range is $50,000 for all filers except joint filers, and $100,000 for those filing jointly. Once a business owner’s taxable income exceeds the upper range of their phase-out threshold ($207,500 for individuals and $415,000 for married filing jointly), they cannot claim a QBI deduction for income generated from a specialized trade or service business.

Examine your practice to determine if all your income is from a specified trade or business. A careful analysis of your practice could identify that it consists of multiple different trades or businesses. For example, an orthopedic practice might sell medical equipment. Breaking this portion of the practice off into its own LLC will decrease the specified service trade or business income and could potentially qualify for a QBI deduction with proper planning.

Shifting Business-owned Real Estate to New Entities and Paying Rent

Many practices own the real estate out of which they operate. If this is the case for a higher-earning business owner, there is an obvious way of converting some of the specified service-business income into income from a business that may qualify for a QBI deduction. In short, the business owner can create a new entity, transfer the real estate into that entity — provided the transfer is not tax prohibitive — and then lease that real estate back to the original business.

The original business’s profits, which are not eligible for the QBI deduction (assuming the business owner’s taxable income exceeds their applicable threshold), will decrease, and profits can be shifted to the new real-estate company, which could potentially qualify for at least a partial QBI deduction.

Example: John is a dentist and is the sole owner of an oral-surgery practice organized as an LLC. His income from the practice — which falls under the specified service business umbrella — is $900,000 per year. Thus, John is currently ineligible for any QBI deduction. Several years ago, the LLC purchased the medical offices out of which the practice operates for $2 million. The upkeep on the office space, the depreciation on the property, and other expenses currently reduce the net profit of the LLC by about $100,000 per year, but the property provides little else in the way of tax benefit for John.

One option to consider in a case like this would be to spin off the medical office building into a separate LLC, or other business structure, and have the dental practice rent space in the building. Those rent payments would be deductible for the medical practice, and taxable income for the new business … except the profit in the new business may be eligible for the QBI deduction.

For instance, suppose that, after spinning the medical office off into its own entity, the dental practice leases the office space at the rate of $220,000 per year. The net result of such a transaction would be reducing the dental practice’s net income $120,000 ($220,000 rental expense minus $100,000 prior expenses ‘lost’ = $120,000). The real-estate entity, on the other hand, would now have a profit of $120,000 — a net shift of zero — but the real estate’s income could qualify for the QBI deduction. Thus, the result is an equivalent amount of business income, but a $24,000 QBI deduction for John on his personal return that, at his tax rate, would save him nearly $9,000 in federal income taxes annually.

Shifting Other Business-owned Assets to Other Entities and Leasing Them Back

For some business owners, there’s the potential to continue to push the boundary even further on shifting depreciable property out of a business, and then leasing it back to the original business entity.

Example: Continuing the earlier example of John and the dental practice above, suppose the practice also owns X-ray machines and a variety of other depreciable medical equipment as well, with an unadjusted basis of $750,000. This equipment could be spun off into yet another business, and the dental practice could lease back the equipment.

The mechanics and potential tax benefits of this move are essentially the same as when real estate is moved into a separate entity. When it comes to the QBI deduction, depreciable business property is depreciable business property. The 2.5% limitation is not impacted by the type of depreciable property or the length of time over which it will be depreciated.

Of course, the limitation to this strategy is that not all small businesses have substantial (or much, or any) depreciable property to spin off into other entities in the first place … and at some point, any and all depreciable property that could be spun off will have been. So that’s it, right? Maybe not.

If You Can’t Lease Equipment, Lease People with an Employee-leasing Company

Many specified service businesses are labor intensive but may not necessarily require a great deal of depreciable property. Anesthesia and radiology practices are both good examples of this. Outside of some office furniture and some computers, these businesses can generate substantial profits without ever owning any significant amount of depreciable property since they operate out of hospital-owned facilities. They do, however, often employ a great number of people, and spend substantial amounts on human capital.

To that end, the language in Section 199A leaves the door open to the possibility of creating an employee-leasing company and leasing back one’s employees from that company. Some practitioners believe this to be a gaping hole in the rules, while other practitioners are a little more cautious at this time. Even on the conservative side, the billing and administrative employees could defensibly be split off into a separate LLC if it can be demonstrated that it is not a specified trade or business because it is not dependent on the skill or reputation of one or more of its employees.

Notwithstanding the benefits of the above strategy, some caution is merited. Tax advisers are understandably eager for answers, but unfortunately, Section 199A is just one small piece of the most significant overhaul of the tax law in 31 years. The IRS is now charged with the herculean task of providing guidance for a host of new and changed statutory provisions, and, as a result, it may be some time before tax advisers have certainty related to some of the strategies posed in this article.

Until that guidance arrives, Section 199A will best be approached cautiously, particularly considering the potential substantial-understatement penalty that comes with claiming a deduction under this provision.

Kristina Drzal Houghton, CPA, MST is a partner with the Holyoke-based accounting firm Meyers Brothers Kalicka, P.C. and director of the firm’s Taxation Division; [email protected]

Banking and Financial Services Sections

Members Only

Katherine Hutchinson says members expect a credit union to be attuned to their needs.

Katherine Hutchinson says members expect a credit union to be attuned to their needs.

Although myths persist about what credit unions are, their leaders are cheered by statistics showing that 43% of Massachusetts residents belong to one. But they know members aren’t satisfied with mere messaging; they want the high-tech tools available at larger banks, melded with a culture of personal service. It’s a challenge they say they work hard to meet.

Michael Ostrowski has made a career in credit-union leadership, and the numbers startled even him.

Specifically, it’s the statistic that 43% of the population of Massachusetts is a credit-union member, compared to about 33% nationally.

“That’s huge. I was surprised by that,” said Ostrowski, president and CEO of Arrha Credit Union. But after considering it, he wondered why that 43% figure should be a shock at all. “I’m surprised more people don’t take advantage of credit unions, from the fees and everything right down the line. We are typically a better deal, and you don’t see any of these credit unions in the newspaper like a Wells Fargo.”

By that, he meant the financial turmoil that many national banks brought upon themselves at the start of the Great Recession — a crisis that actually led to marketing opportunities for credit unions, said Katherine Hutchinson, president and CEO of UMassFive College Federal Credit Union.

“We did see growth throughout the recession,” she told BusinessWest. “We wanted to make sure we were not letting our members down by not lending through that period, but we were also very conscientious about how we were spending our money — all the things good financial institutions do to protect the interests of their shareholders and, in our case, our members. That’s really important to us, and I think it was a time where people were taking a second look and saw credit unions as alternatives.”

The lobby walls at UMassFive’s Hadley headquarters are adorned with messaging touting the member-centric (don’t call them customers) philosophy of credit unions, and, “believe me, we try very hard to follow the philosophy,” Hutchinson went on. “I’ve been at the credit union for 42 years — I’ve kind of grown up in the industry. When I started, we were very focused on the member, and I’ve tried to convey that and live that philosophy as we grew bigger.”

Credit unions are financial institutions that look and feel like a bank in the products and service they offer, she explained, but the difference is their structure as cooperatives.

“Because of a credit union’s non-for-profit status, consumers do expect better rates and lower fees, and I think that’s what they experience,” she said. “But they also want us to be focused on what they need, on how we can help them personally — to listen to their story, hear about why they’re in a certain situation, and what would really help them.”

Glenn Welch says local leadership means credit unions can respond to members’ concerns quickly.

Glenn Welch says local leadership means credit unions can respond to members’ concerns quickly.

Glenn Welch, president and CEO of Freedom Credit Union, said member ownership of the institution is important to those who do business there. “Whether you have $5 in your account of $500,000, it’s one member, one vote,” he said, adding that members of his board of directors must hail from the four western counties. “The board is local, so members know we can make decisions and resolve situations quickly.”

Resolving situations, and writing more success stories, is a point of pride for UMassFive, Hutchinson noted. “I think it’s important that we hear those stories and share those stories to encourage our employees to listen to the members and find ways to help. The stories are important.”

Numbers Don’t Lie

The story for credit unions has been positive in recent years, Ostrowski said, pointing to statistics like a capital-to-assets ratio of 10.4%, on average, for credit unions in Massachusetts. “Over 7 is well-capitalized — we’re over 10. That shows strength in the credit-union industry.”

Meanwhile, the 167 credit unions in Massachusetts employ 6,158 people full-time and another 908 part-time, and boast more than 2.9 million members — again, about 43% of all residents.

Still, myths persist about credit unions, Welch said, sharing four common ones identified by the Credit Union National Assoc.

The first myth: “I can’t join.” CUNA points out that many Americans believe they are ineligible to join a credit union, but membership eligibility today is typically based on geography, he noted. Membership at Freedom Credit Union, for example, is available to anyone who lives, works, or attends college in Hampden, Hampshire, Franklin, or Berkshire counties.

The second myth: “accessing my money may be hard.” Not true, Welch said, noting that, along with boasting a mobile application for online banking, many credit unions, including Freedom, have joined the Allpoint Network, allowing members surcharge-free ATM access at more than 55,000 retail locations worldwide.

The third myth: “they’re too small.” Rather, he noted, credit unions provide the same security and protection of a larger financial institution, but is accountable to members, rather than shareholders. “This means every customer is treated as an individual, not a number, enjoying personalized service and customized products.”

The final myth: “they’re primarily for those in need.” Based on generational notions, Welch explained, some may believe credit unions mainly serve low-income consumers. In truth, he added, they serve every population, as well as every size and type of business.

Essentially, he told BusinessWest, the CUNA survey demonstrated that many people don’t understand what membership means and how to go about applying to be a member.

“Several things came up; one was that they didn’t feel that credit unions can offer them the level of technology and products of banking institutions. But we had a good year in 2017 and approached the board with quite a few investment upgrades,” he noted, expanding the tasks that can be done online, like electronically signing for loans.

“People don’t want to set foot in a bank or credit union lobby unless they have to,” he continued. “We have the same products available at bigger banks, but at a local level.”

Ostrowski agreed that credit-union members appreciate the institution’s purpose and philosophy, but also demand current technology. In fact, Arrha is in the process of upgrading all its systems to improve electronic communication and its mobile banking platforms.

“I think the credit unions are still filling that void of the banks that had their roots in the small towns, and that really hasn’t changed,” he said. “But I think it’s important that people realize that we have the same systems all the big banks have, and we have the same cybersecurity functionality they do. Clearly, from a systems standpoint, we can compete very well with them.”

Michael Ostrowski says credit-union members expect the same high-tech products they can find at large banks.

Michael Ostrowski says credit-union members expect the same high-tech products they can find at large banks.

Likewise, Hutchinson noted that the area colleges the credit union was built upon still form its core membership group, but it wouldn’t have grown beyond that without a recognition in the region of the credit-union philosophy — and without a commitment on the institution’s side to stay atop trends in products and services and continually invest in technology. “That is important to growth and our sustainability, so we’re proud of that.”

Loan Stars

Ostrowski said messages like this — and a vibrant economy — have helped Arrha grow steadily in recent years, with deposits up, loan delinquency down, and investments in technology helping to attract new members.

Meanwhile, Welch noted that the competitive interest rates Freedom pays on savings accounts and charges for loans have both attracted new business. All that led to growth in 2017 in return on assets and total loans, as well as hiring a second commercial lender and a credit manager, focusing on individuals and small businesses.

“Typically, we don’t lend more than $3.5 million or $4.5 million, although we could, based on capital,” he noted.

But the credit-union presidents BusinessWest spoke with all noted that the model’s philosophy doesn’t stop at dollars and cents, but extends to a robust community outreach, often in the form of educational seminars.

“That goes to the concept of people helping people,” Welch said. “We find, when we’re not able to help someone, it’s usually a credit issue, and often, they haven’t been educated on the value of credit. So we participate with other banking institutions in Credit for Life fairs, reaching out to students when they’re still in high school to talk about good and bad credit, and what that means when they try to buy a car, rent an apartment, or get a credit card.”

Hutchinson said her board believes community education is important to UMassFive’s mission. “So many people need that kind of assistance. It ties back into what is best for our members — educating them on how to make decisions.

“Financial literacy is key,” she went on. “We try to have a variety of topics, from understanding your credit score to budgeting to preparing for retirement and first-time homebuying. We also work with UMass, doing some seminars for students on student debt.”

Ostrowski noted that even recent college graduates don’t understand their credit score and the impact it can have, while others take advantage of a credit-card offer in the mail and quickly wind up thousands of dollars in debt without thinking about the consequences. “All our programs in financial literacy are drivers that we make no money on — they are absolutely out of love of our members and to protect them.”

The credit-union culture runs deep in Massachusetts, the state where such institutions were first chartered way back in 1909, Ostrowski explained. State partnerships are still critical, he added, noting that Gov. Charlie Baker has backed an effort by the state’s credit unions, called CU Senior Safeguard, to fight elder financial abuse and fraud. All frontline credit-union staffers are participating in the program, while a statewide effort is targeting consumers with information about how elders are defrauded — a problem that costs some $10 billion every year nationally.

“I’ve heard wild stories about members getting ripped off by contractors,” he said, or individuals who were ready to send money to an unknown e-mailer on the promise of more in return. “I’ve literally had to argue with individuals not to send their money away.”

Better, he said, to deposit it with a credit union — and join that 43% number that, in an age of constant mergers and acquisitions among area banks, only continues to grow.

Joseph Bednar can be reached at [email protected]

Banking and Financial Services Sections

Addition by Addition

While there are plenty of banks doing business in this region, Jeff Sullivan says, there is an opportunity for a new one that is based locally.

While there are plenty of banks doing business in this region, Jeff Sullivan says, there is an opportunity for a new one that is based locally.

 

Jeff Sullivan has spent more than 30 years working in and around the region’s banking community, most recently as chief operating officer for United Bank.

So he understands fully when people use that term ‘overbanked’ to describe this area. In fact, he’s used that word himself over the years as he’s watched branches proliferate in a host of area communities.

But over the past few years as he’s done consulting work for the industry after leaving United following its merger with Connecticut-based Rockville Bank, Sullivan says he’s come to understand that just because there are branches on almost every corner in some cities and towns, that doesn’t mean the region’s population — and especially certain segments of it — are adequately served.

“There’s plenty of good local banks around,” he told BusinessWest. “But there is opportunity, because the largest financial institution based in the city of Springfield now is a credit union. So there is opportunity for a Springfield-based institution with local decision making.

“I was getting asked by a lot of people — individuals I would just bump into on the street or in the supermarket — ‘can you send me to a good lender?’ or ‘can you give me a good bank to go to?’ or ‘are you going back to work? I need to make a switch,’ he went on. “After that happened 10 or 12 times in a relatively short period of time, I began to think there was room for a new bank.”

And these sentiments, grounded in what Sullivan considers more scientific analysis and sound due diligence, has led him to partner with attorney Frank Fitzgerald and Jim Garvey, owner of St. James Check Cashing, to begin the process of adding a new bank to the landscape.

It will be called New Valley Bank & Trust, the partners announced late last week, adding that the team is now seeking approval from the Federal Deposit Insurance Corp. (FDIC) to form the new institution before launching a capital raise aimed at amassing $25 million to $30 million.

This will be the first new bank launched in the area since NUVO Bank (since acquired by Community Bank) opened in 2008. New Valley Bank & Trust almost certainly will open in better economic conditions — NUVO had the misfortune of launching just as the country was heading into the Great Recession — and it will have a different model, said Sullivan.

Indeed, while NUVO was focused on a mostly digital banking model — it has just one branch, in downtown Springfield — New Valley will have slightly more of a brick-and-mortar foundation, he explained.

It will be headquartered in downtown Springfield and will start with a full-service branch somewhere in the city (the location has not been determined) and a second location on the west side of the Connecticut River (again, that community has not been chosen) within a year after opening.

New Valley, like most banks now doing business in this region, will offer a full range of business and retail banking services for residents and small to medium-sized businesses in Massachusetts and Northern Conn.

Like NUVO, though, this proposed new institution will focus considerable energy on commercial lending, said Sullivan, who has spent most of his career in that realm. Despite stern competition in the commercial market and a huge number of established players, he sees room for opportunity.

That opportunity — on both the commercial and residential sides of the ledger — results from the spate of mergers and acquisitions in recent years, he told BusinessWest, an ongoing development that has decreased the population of community banks and, as he noted, left Springfield without a bank headquartered within its boundaries.

“With fewer local banks servicing the region, we have heard from countless residents and small to medium-sized business owners that are looking for a level of customer service and credit that is simply not available in the market today,” Sullivan said in a press release announcing formation of New Valley. “Our focus will be on meeting this demand with personalized attention and cutting-edge technology that will shorten wait times for funding decisions and opening accounts.”

On the commercial side, the bank will focus on smaller loans and quick turn-around times, said Sullivan, adding that the mergers in recent years have created opportunities to meet a specific niche.

“We have a lot of good banks around here, but they’ve grown to a larger size,” he explained. “And they’re focusing on larger deals than they probably did 10 years ago. I think there’s a real opening for personal service being delivered to small businesses.”

But another point of emphasis for New Valley will be what Sullivan described as a still-large population of area households that are “unbanked and underbanked.”

Elaborating, he said research continues to show that the volume of business at check-cashing establishments has remained fairly stable — and comparatively high — in this region, despite considerable improvement in the economy over the past decade.

Sullivan and his partners estimate there are some 20,000 households in Hampden County alone that use a bank sparingly, if at all, and in these numbers, he sees more opportunity in the form of need for a new bank.

“These are working women and men whose barrier to entry into the banking system has been too high for too long,” her went on. “As a local bank, we want to find opportunities to serve this significant segment of our community and create lifelong customers in the process.”

Elaborating, Sullivan noted that, in many cases, individuals or households don’t use banks because of a lack of trust or because of a bad experience — or several.

“The biggest reason, the FDIC says, is lack of trust,” he explained. “They don’t trust the system. People have had bad experiences; they got kicked when they were down, and it’s led to a lack of trust.”

In response, New Valley will offer products and services designed to build trust, he went on, such as bounce-proof checking accounts, incentivized savings accounts, and financial-literacy programs.

Sullivan said the need for a new, locally based, bank can be verified by the makeup of the 60 founding sponsors — what he described as a “large and diverse group of business owners and entrepreneurs from throughout the region — and the enthusiasm shown for the concept, especially among young business owners.

That’s significant, he said, because they will have to be the backbone of the customer base moving forward.

“We decided that, if we were going to do this, it has to be about a younger generation of business cohort,” he explained. “So we needed to know if the Millennials and the Gen-Ys care enough about this kind of stuff.

“We had a series of focus groups — we put about 100 people in a room, 20 people at a time, and we pitched them on what we were trying to do,” he went on. “About 60 people wrote checks to give us the seed money to get started, and of those 60, close to half of them were people under the age of 45. We were pleasantly surprised by that, and based on that response, we decided to take things to the next level, which is where we are today.”

—George O’Brien

Banking and Financial Services Sections

The Tax Cuts and Jobs Act

By Sean Wandrei

Sean Wandrei

Sean Wandrei

In December 2017, Congress passed H.R.1, better known as the Tax Cuts and Jobs Act. The act is the largest overhaul of the tax code since 1986. As with any new legislation, there are opportunities and pitfalls that one needs to be aware of when trying to take advantage of the new rules and avoid unwanted situations.

There are still many questions related to the act that the IRS will need to issue guidance on. There is a lot to unpack here, so let’s take a look at some items that businesses and individuals should be aware of.

The act reduces the corporate tax rate to a flat tax rate of 21%. This means the first dollar of taxable income is taxed at a 21% rate. This reduction could cause many owners of non-taxpaying entities (e.g. partnerships, limited liability companies, and S-corporations, also known as pass-through entities) to consider switching to a taxpaying entity (i.e. C-corporation). The maximum tax rate that the income of a pass-through entity could be taxed at is 37%.

Business owners could decide that their business should convert from a pass-through entity to a C-corporation based on this. While the reduction of the tax rate sounds great, there could be some issues that could increase the overall tax due if the entity is a C-corporation. If the owner(s) want to take money out of the C-corporation in the form of dividends, it will have to pay taxes on the dividends from the C-corporation at a maximum rate of 23.8% (20% tax on the dividend plus 3.8% net investment-income tax).

This is known as double taxation, which impacts only C-corporations and not pass-through entities. This could reduce or eliminate the overall tax savings of converting the entity to a C-corporation.

While taxes paid are usually a major factor on entity selection, there are some non-tax items to consider. Owners of C-corporations can receive tax-free employee benefits that pass-through entities are not entitled to. Another tax-savings option that was available prior to the act is the exclusions of the gain on the sale of qualified small-business stock (QSBS) under Code Section 1202. This provision was amended in 2010, allowing QSBS acquired after Sept. 27, 2010 to be eligible to exclude the total gain on the sale.  There are a few rules that have to be met to allow for the 100% exclusion. Section 1202 is available only for C-corporations. This means that, when the owner decides to sell his or her stock, the gain from the sale of that stock would be tax-free. The reduced tax rate and non-tax benefits could make C-corporations more attractive to some.

C-corporations are not the only business entities that received a tax break from the act. Pass-through entities are able to take a deduction of 20% on the qualified business income (QBI) earned from the business. Individuals who are sole proprietor and file a Schedule C and individuals with rental activity reported on Schedule E also qualify for this deduction.

On the surface, this deduction seems to be straightforward, but there is a lot to this deduction. Not all businesses qualify, and the deduction could be limited. QBI can be thought of as ordinary income from the business. The catch is that the deduction is limited to the lesser of 20% of QBI or 50% of the total W-2 wages paid by the business. So wages need to be paid to be able to take this deduction.

The 50% of W-2 wages does not apply if the owner’s taxable income is below $315,000 for married filing jointly (MFJ) and $157,500 for other taxpayers. This deduction may not be available to a specified service trade or business (SSTB). A SSTB is a business involving service in many fields, including law, accounting, consulting, and financial services. Engineers and architects were excluded from the definition of SSTB in a last-minute change. If the owner’s taxable income is below $315,000 for MFJ and $157,500 for other taxpayers, the SSTB limitation does not apply.  

The planning that comes into play for this deduction is based on the entity type. QBI does not include reasonable compensation paid by an S-corporation to the owner(s). Similarly, QBI does not include amounts paid as guaranteed payments by a partnership to the owner(s).

Based on this, if the pass-through entity is an S-corporation, reasonable wages are going to be deducted from the QBI, which will reduce QBI and the deduction. A partnership and sole proprietor are not required to take guaranteed payments, so the QBI could be larger for a partnership than an S-corporation based on this. If the taxable income is below the limits mentioned above, the 50% of W-2 wages option does not come into play, and the larger deduction will be had by the partnership and sole proprietor.

If the 50% of W-2 wages comes into play, then the S-corporation will have to pay W-2 wages, and the partnership will have to pay guaranteed payments to owners or wages to non-owners to be able to take this deduction. With this in mind, the owner’s taxable income will need to be monitored.

For individuals, the elimination of exemptions and the doubling of the standard deduction will cause more taxpayers to take the standard deduction instead of itemizing. It is said that only 10% of the population will itemize in 2018 compared to 30% in 2017. If you fall into the 10% of people who itemize, you may have heard that one of the biggest deductions, state and local taxes, is limited to $10,000 per return.

This is the case if you are single or filing as MFJ; the deduction is limited to $10,000. The marriage penalty is back. If the MFJ couple was not married and filed as single taxpayers, then they each would be able to deduct up to $10,000 in state and local taxes.

In the past, the interest from a home-equity loan was deductible. The proceeds from the home-equity loan could have been used for anything. Now the interest from a home-equity loan is no longer deductible unless it is used to buy, build, or substantially improve the taxpayer’s home that secures the loan. Prior to the act, employees were able to deduct unreimbursed business expenses related to their job. This is no longer the case.

As you can see, the act has provided many new things to consider when it comes to taxes. Now, more than ever, your CPA will be counted on to help with tax planning.

Sean Wandrei is a lecturer in Taxation at the Isenberg School of Management at UMass Amherst. He also practices at a local CPA firm; [email protected]

Banking and Financial Services Sections

Entertaining Thoughts

By Carolyn Bourgoin, CPA

Carolyn Bourgoin

Carolyn Bourgoin

For many businesses, corporate entertainment has long been a means of building relationships with referral sources, vendors, and strategic partners as well as providing networking opportunities for physicians and practice managers to meet new referral sources and industry influencers and to build a presence in the marketplace.

The recently enacted Tax Cuts and Jobs Act (TCJA) has eliminated most deductions for business-entertainment expenses paid or incurred after Dec. 31, 2017. Drawing the line between the portion of an entertainment activity that is business-related versus for pleasure has long been an area of contention between the IRS and taxpayers. Though the TCJA did eliminate most business-entertainment expenses, certain expenditures, mainly those benefiting employees, did survive the tax cut.

Taxpayers need to understand what expenses survived the repeal so that they can properly segregate the deductible costs.

Expenditures Paid or Incurred Prior to 12/31/17

Prior to the TCJA, entertainment expenses and the use of entertainment facilities were deductible only if the taxpayer could establish that the costs were either directly related to a taxpayer’s trade or business or associated with the active conduct of a trade or business for which a substantial and bona fide business discussion occurred either directly before or after the event. In addition to meeting the ‘directly related to or associated with’ test, entertainment-expense deductions had to satisfy strict substantiation requirements, including details on the amount of the expense, the time and place of the entertainment, the business purpose, and the business relationship with the persons entertained. The term ‘entertainment’ includes activities at country clubs, nightclubs, sporting events, cocktail lounges, and theaters. Though not defined by regulations, business-entertainment expenses are to be further reduced by amounts considered “lavish or extravagant.”

Additional cost limitations apply to skybox rentals, sports tickets purchased for more than face value, and attendance at foreign conventions. Country-club dues were (and still are) nondeductible.

Business entertainment expenses that had escaped limitation at this point were then generally limited to 50% of the expense, unless they fell under one of several exceptions, including certain entertainment expenses included as compensation to the recipient and social or recreational entertainment provided primarily for the benefit of employees who were not highly compensated. These business-entertainment expenditures were fully deductible and survived the TCJA repeal and will be addressed later in this article.

Entertainment Expenditures Paid or Incurred After Dec. 31, 2017

Pursuant to the TCJA, expenses related to entertainment, amusement, or recreation that are directly related to or associated with the active conduct of the taxpayers’ trade or business are no longer deductible. As a result, a tax deduction will not be allowed for the following items incurred after Dec. 31, 2017:

• Expenses incurred for the use of entertainment facilities, such as the lease of skyboxes, are no longer deductible. However, businesses should review their lease agreements to see if there may be a component included in the rental price for advertising. This portion of the rental cost would be fully deductible as advertising if properly documented and reclassified;

• Expenses related to the entertainment of a client or prospect at a sporting event, theater, concert, or similar type venue (unless included in a 1099 as a prize) are not deductible under the new rules;

• Expenses for attending charitable sporting events, such as a golf tournament, where the entire net proceeds go to charity, will not be deductible to the extent of the cost of the golf or other goods or services provided. Until further guidance is issued, it is unclear whether the meals offered at an entertainment event are still 50% deductible. To the extent the ticket price exceeds the goods and services received, the taxpayer will be entitled to a charitable deduction; and

• As was the case prior to the tax-reform act, dues paid to any social, athletic, or sporting club or organization are non-deductible expenses.

Business-entertainment Expenses Still Allowed

As discussed previously, there are nine categories of entertainment-related expenditures that were not eliminated by the TCJA, as follows:

• Expenses for recreational, social, or similar activities (including related facilities) offered primarily for the benefit of employees other than highly compensated employees are fully deductible. A holiday party or annual picnic are examples;

• Expenses directly related to bona fide business meetings of stockholders, employees, agents, or directors are allowed. Examples of such expenditures would be refreshments offered to employees at a meeting where they are being instructed in a new business procedure. Food and beverages served at these meetings would be subject to the 50% limitation;

• Expenses directly related and necessary to attendance at a business meeting or convention held by a business league, chamber of commerce, real-estate board, or board of trade are deductible. Meals at these meetings would be subject to the 50% limitation;

• Expenses for services, goods, and facilities made available by the taxpayer to the general public, such as during a promotional campaign, are deductible;

• Expenses for food and beverages furnished on the taxpayer’s business premises primarily for the taxpayer’s employees (i.e. more than half), are deductible. The cost of meals provided for the convenience of the employer, such as when employees must be available throughout a mealtime, are only 50% deductible as of Jan. 1, 2018. Prior to the TCJA, these meals were 100% deductible. In addition, meals provided at an employer’s on-site dining facility are subject to the 50% limitation until Jan. 1, 2026, when meals for the convenience of the employer as well as the meals and cost of operating an on-site dining facility are no longer deductible;

• Entertainment expenses that are treated as compensation to employees, by including the costs in employee wages for income-tax-withholding purposes, are deductible;

• Expenses for entertainment-related goods or services, to the extent they are includible in the gross income of the recipient as compensation for services rendered or as a prize or award, are allowed. The recipient in this case would not be an employee of the taxpayer and must be issued a 1099 to the extent the goods or services received exceed $600;

• Expenses for goods or services (including the use of facilities) which are sold by the taxpayer in a bona fide transaction for adequate and full consideration in money or money’s worth are deductible. An example of this would be the cost of meals sold by a restaurant, and

• Expenses incurred by a professional firm for actual meal expenses that are charged back and reimbursed by a client, where the meals are separately stated in the invoice, are deductible.

De minimis fringe benefits, which are benefits that are so small as to make accounting for them unreasonable, such as coffee, soft drinks, and donuts offered to employees, remain fully deductible through the tax year 2025. In addition, meals associated with the active conduct of the taxpayer’s trade or business are still allowed, subject to the 50% limitation. Until further guidance is issued, it is unclear whether meals purchased at a business-entertainment event, such as after a round of golf or attending a ballgame, are a non-deductible entertainment expense or if they meet the business-related tests and are still deductible subject to the 50% meals limitation.

Classifying sporting tickets provided to clients as business gifts does not provide much relief, as the tax deduction is limited to $25 per item.

Bottom Line

Due to the recent changes in the tax law, it is important for taxpayers to consult with their tax advisors and develop an understanding of the business meals and entertainment expenses that remain deductible and develop a strategy to track them. It would be wise to set up separate accounts based on whether they are 100%, 50% or nondeductible.

Amounts paid to attend entertainment events should be analyzed to see if there are advertising or charitable components to the cost that can be reclassified as fully deductible. Consideration could be given to issuing 1099s to clients or prospects being provided with free tickets to events to make the cost deductible as prizes. Though the TCJA was not favorable to taxpayers that incur business-entertainment expenses, there are still some expenses in this area that remain deductible.

Carolyn Bourgoin, CPA is a senior tax manager with the Holyoke-based public accounting firm Meyers Brothers Kalicka, P.C.; (413) 322-3483; [email protected]

Banking and Financial Services Sections

Happy Returns

Since taking over as president of Monson Savings Bank seven years ago, Steven Lowell has overseen an impressive growth pattern, including striking success in commercial lending and ever-rising assets. He credits that success to a number of factors, from a willingness to embrace technology to a customer-focused culture to an emphasis on financial literacy aimed at making sure the customers of tomorrow are well-positioned to share in the bank’s success.

Five years ago, Monson Savings Bank opened its fourth branch in Ware, to go along with offices in Monson, Wilbraham, and Hampden.

And that’s where the branch total stands today: Four. Which would be a meager haul in one of the big-bank acquisitions that have become so commonplace.

So why is MSB growing at such a healthy rate? President Steven Lowell has a few ideas.

“A lot of people are saying that small banks can’t survive, that they need to be bigger, they need to merge. And we’ve seen some of that. But Monson Savings Bank isn’t just surviving; it’s thriving,” Lowell said, noting that the institution has grown by 7% to 8% every year since he took the reins seven years ago.

“That’s a strong number,” he added, noting that the bank’s assets have risen from $230 million seven years ago to $365 million today.

“People think a bank needs a certain asset size to afford the expenses that every bank has at this point in time,” Lowell said, specifically citing increased regulatory and compliance demands in an industry that’s increasingly heavily regulated. “But we haven’t merged with anyone or had anyone merge into us; we’ve been successful in attracting new customers and developing new relationships.”

We’re performing better than many billion-dollar banks are. We’re living proof that small banks can do it, and do it well.”

He noted that MSB’s return on assets, or ROA — which measures a bank’s profits in relation to its overall resources — was 0.6 last year, while Massachusetts-based banks in MSB’s asset class — $250 million to $500 million — recorded an average ROA of 0.27. Meanwhile, banks in the $500 to $1 billion range averaged an ROA of 0.53 last year, and banks with more than $1 billion in assets averaged 0.72.

“We’re performing better than many billion-dollar banks are,” at least by the ROA metric, Lowell noted. “We’re living proof that small banks can do it, and do it well.”

A few different factors account for that success, he told BusinessWest. First was the determination made several years ago that the strongest market for the bank is commercial lending, and since then, commercial loans have risen from 40% of the total portfolio to around 65%.

“That’s been a significant driver for us,” he said. “We focus on what we do well; we don’t try to be everything for everyone. At our size, we can’t do that. But we know we’re good at commercial lending — and residential lending — and good at providing high-touch customer service. Everything we do goes back to, ‘is this good for the customer?’ We want to make sure we don’t lose that closeness with the customer.”

With all the mergers that have taken place in recent years, he suggested, business owners are looking for a banking partner they know is going to be around, and don’t like it when their loan officer keeps switching.

“We’ve been the beneficiary of a lot of these mergers,” he went on. “And we’ve developed a reputation as a bank that’s easy to do business with. We’re up front with customers and try to be as fast and efficient as we can, and that reputation starts to get around. Now we’re getting phone calls: ‘I was talking to so-and-so, and he raved about you guys, that you’re easy to do business with.’ That reputation is very important to us and has helped us spread our reach much farther.”

He also praised his team, which hasn’t necessarily grown larger — technology has created efficiencies for all banks, and, as noted earlier, MSB’s branch count is only four — but the team is peppered with long-timers who understand the customer-focused culture, a culture Lowell expects to continue to build more organic growth.

Early Adopters

Speaking of technology, MSB has consistently been an early adopter of innovations that make customers’ lives easier, from mobile banking to remote check capture. “We’re not large enough to be an innovator — we can’t be creating new software — but we’ve been right there, so as soon as a product is proven, we’ve adopted it successfully,” Lowell explained.

Some recent products speak to that success. Mobile check deposit allows far-flung cutomers to make deposits from home or anywhere else, on weekdays or weekends.

“Not only our retail customers, but our commercial customers are very comfortable not having a branch within five miles,” he noted, adding that these capabilities have allowed customers — such as a landscaping company on Cape Cod — to access services without needing a physical branch.

“We’re not marketing ourselves on Cape Cod or in the Boston area,” he noted, “but if someone has ties to Western Mass. and wants to do business in one of these areas, we can accommodate them, and they love that.”

Steve Lowell, Monson Savings

Steve Lowell says customers appreciate MSB’s stability at a time when many other small banks have merged or been acquired.

Another recent product, the CardValet mobile app, gives users complete control of their debit card, so they can essentially shut it off between uses, or if it goes missing. “There’s so much fraud in the world, and cybersecurity is a big concern,” Lowell said. “This is a great product, and we don’t charge for it; I think it’s going to be big.”

A new loan product marries the bank’s well-known financial-responsibility messaging by marrying a deposit account and a secured loan, the latter of which is deposited into an account accessible only when the loan is paid off. “From the bank’s standpoint, there’s no credit risk, and the customer is building credit, whether it’s for a down payment on a car or a first month’s security deposit. It’s a good product for people who are just starting out or running into issues trying to re-establish good credit.”

It slots well into MSB’s continued focus on financial literacy, which ranges from its Dollars & Sense program in elementary schools to workshops for college students and community members. A survey conducted by the National Foundation for Credit Counseling shows that 40% of the public would grade themselves a C or worse when it comes to their financial literacy, and that lack of knowledge can lead to poor financial planning and hurdles when it comes time to seek a loan.

“Financial literacy is really important to us,” Lowell said. “Day in and day out, our staff see people they have to turn down for mortgage loans, and they don’t like doing that; it’s not a fun part of the job.”

With that in mind, he went on “we’ve come up with ways to talk to people and help them improve their financial lives, whether it’s how important it is to build credit or how not to get in trouble with credit-card debt, or the importance of saving for retirement and contributing the most you possibly can to your 401(k), and paying yourself before paying others.”

Lowell feels like today’s parents, for whatever reason, don’t like talking about these matters with their kids, and when the kids grow up, they haven’t developed a comfort level, and may be at the mercy of predatory credit companies that aren’t looking out for their best interest. “It’s important for us to be talking about that so they know how to manage money and get into a good place.”

That Monson Savings Bank puts resources into these educational programs says a lot about its desire to be a complete community resource in the towns it serves, and to continue adding products and services that customers want.

“I believe one of our strengths, because of our size, is that we can be really nimble,” he said. “We’re able to come up with new initiatives and new products a lot quicker than some of the bigger banks. We don’t have quite the amount of red tape most banks have to deal with.”

One example, he noted, is MSB’s newest initiative, a foray into municipal banking. Since appointing an officer to lead that effort six months ago, the bank has posted $10 million in municipal deposits. “That decision was made because somebody very good became available, and we saw it as a growth opportunity that presented itself, and we didn’t want to lose that opportunity.”

Giving Back

Monson Savings Bank has invested in the community in other ways as well, most notably through annual donations to various nonprofits, which totaled more than $130,000 last year.

The year Lowell arrived, MSB launched an initiative to ask the public for help in selecting some of the nonprofits that would receive funding. The bank solicits nominations on Facebook and through other outlets, and the top 10 vote getters receive donations. More than 300 organizations received votes last year, and the top 10 were given grants between $750 and $2,000.

“People get really excited about it,” he said. “And I think community philanthropy is really good for business, and that has helped us be successful. We sponsor sports teams, we’re involved in most of the school systems, giving them money for various programs, we give some scholarships … people appreciate that.”

They also appreciate efforts by bank leadership to be accessible, he went on.

“We send a newsletter to all our customers, and my e-mail is on that newsletter. I give out my direct phone number to customers all the time. I’ve even given out my mobile number on the weekend. I think the accessible reputation of the bank is very important to our commercial customers in particular.”

Lowell said an emphasis on accessibility extends to the employees as well.

“Sometimes the people with the best ideas are the people on the front lines, so I’m talking to them, but I’m also asking what the customers are saying,” he told BusinessWest. “When a customer takes the time to send me an e-mail or give me a call because he’s not happy with us, that’s important for me to hear. Some of the best ideas come from a customer saying, ‘you guys did this, and I didn’t like it,’ and we’ve ended up changing it.

“I’ve had really good input from customers who were unhappy or felt we fell a little short,” he went on. “I’m convinced that’s how you get better. We’re in a competitive environment, so if you’re not getting better all the time, you’re losing ground — and we can’t afford to lose ground.”

Joseph Bednar can be reached at [email protected]

Banking and Financial Services Sections

Growth Engine

Tracey Gaylord of Granite State Development Corp. (right) with Shannon Reichelt, who used Granite State’s services to finance a new property for her company, S. Reichelt & Co.

Tracey Gaylord of Granite State Development Corp. (right) with Shannon Reichelt, who used Granite State’s services to finance a new property for her company, S. Reichelt & Co.

Certified development companies, or CDCs, are entities that partner with banks to help small businesses secure financing to grow their operations. But in doing so, they’re also growing the economy by promoting economic development, which is, in fact, a key element of their mission. Since its inception in New Hampshire in 1982 — and its subsequent, ever-expanding work across Massachusetts — Granite State Development Corp. has been executing that mission.

Shannon Reichelt recently purchased a building in Holyoke to consolidate her CPA organization, S. Reichelt & Co.

Meanwhile, Ben LaRoche and Jared Martin purchased a property in Lanesboro to house their technology-integration business, Amenitek; Gordon and Patricia Hubbard bought Hidden Valley Campground in Lanesboro and renamed it Mt. Greylock Campsite Park; and Pat Ononibaku purchased the adult day-care operation known as ThayerCare and renamed it Bakucare.

Then there are Anthony Chojnowski, who is building a new structure for his clothing store, Casablanca, in Lenox, and Frank Muytjens and Scott Cole, who are developing the Inn at Kenmore Hall in Richmond, near the New York line.

While those are six very different businesses, the common thread is how they financed their property purchases: through the certified development company (CDC) called Granite State Development Corp. (GSDC).

“We work with businesses looking to either acquire an existing business that has tangible assets, or take a loan on real estate or piece of equipment,” said Tracey Gaylord, Granite State’s vice president and business development officer.

Specifically, Granite State is a nonprofit lender authorized to process and service Small Business Administration (SBA) loans utilizing the 504 lending program (more on that later). It’s the second active certified development company (CDC) in New England and provide financing in the states of Maine, Massachusetts, New Hampshire and Vermont.

“The main goal is to promote economic development and job growth,” Gaylord said. “We help banks do loans they might not be able to do otherwise.”

Those loans are spread among a broad range of sectors, she added. “We do anything from manufacturing companies to wineries to restaurants to healthcare facilities to assisted living to campgrounds. And equipment financing for manufacturing — big machines they might buy every 10 or 15 years — we do a lot with those types of projects as well.”

For this issue’s focus on banking and financial services, Gaylord explained why companies find the 504 loan program — and Granite State’s services — an attractive option when financing a purchase or investing in future growth.

Impressive Growth

GSDC President Alan Abraham created the company in 1982 in Portsmouth, N.H., with a geographic territory initially limited to three counties in that state. In 1986, its territory expanded to include the entire state of New Hampshire, and it has since grown to provide statewide coverage for the four northernmost New England states, including Massachusetts.

Granite State Development is one of the largest CDCs nationwide, ranking fifth in both loan volume and dollars, and has been the most active 504 lender in New England for almost a decade. Since 1990, in cooperation with its bank lending partners, the nonprofit has participated in more than 4,000 transactions worth more than $1.5 billion, helping create more than 20,000 jobs in New England in the process, based on borrower growth stemming from the loans.

Meanwhile, 2017 was a banner year for GSDC in Western Mass., where it has poured increasing resources in recent years, as most of its Bay State projects have historically been farther east.

Those projects fall under the SBA’s 504 loan program, which provides approved small businesses with long-term, fixed-rate financing to acquire assets for expansion or modernization. These 504 loans are made available through CDCs like Granite State. CDCs — there are more than 260 nationwide — are certified and regulated by the SBA, and work with SBA and participating lenders, typically banks, to provide financing to small businesses.

A typical 504 loan is structured in three parts: 50% is a lien from the bank, 40% is a second lien through the CDC, and 10% is a required down payment from the borrower.

This is an important element in the program, Gaylord noted, as many banks require 20%, 25%, even 30% down for certain loans, simply as a matter of policy, “and this actually allows them to do projects people may need.”

At the same time, it’s a win for the borrower, she added, because a bigger down payment may cut into funds they need to get through a lean time. “Maybe it’s a seasonal business, and they need money to get through the winter, to fill that gap.”

The bank sets its own interest rate and term for its 50% share of the loan, she went on. “If they want to do a fixed five-year rate, they can do that. They do not have to match what we do. That’s the benefit for the bank.”

As for GSDC’s portion, it determines terms based on the type of project, she explained. A real-estate project might come with a 20-year term, while 10 years might be more appropriate when purchasing a piece of equipment with a useful life of 10 to 15 years.

“Whatever the type of project, the bank chooses what to do with the other 50%,” Gaylord said. “People say, ‘why would I use this program?’ My quick response is, ‘it’s a low capital investment and a low fixed rate.’”

There are limits to what 504 loans may be used to purchase, however. They are specifically intended for fixed assets and certain soft costs, including the purchase of existing buildings; the purchase of land and land improvements, including grading, street improvements, utilities, parking lots, and landscaping; the construction of new facilities or modernizing, renovating, or converting existing facilities; the purchase of long-term machinery; or the refinancing of debt in connection with an expansion of the business through new or renovated facilities or equipment.

The 504 program cannot be used for working capital or inventory, consolidating or repaying debt, or refinancing, except for projects with an expansion component.

Bigger Picture

At its heart, the 504 lending program and CDCs like Granite State exist not only to help small businesses, but to boost economic development over an entire region. In short, applicants must demonstrate that their purchase or investment will create jobs.

“That’s one of the primary purposes of this,” Gaylord said. “We have to track the number of jobs the business has at the current time and how many jobs they’re predicting they’ll have in the first year and the next 24 months.”

That calculation incorporates job retention as well, she noted. “If they have only two employees but doing the project means they’ll be able to retain those two, that’s fantastic. If they can create more jobs, that’s even better.”

According to the SBA, community-development goals of the 504 loan program include improving, diversifying, or stabilizing the local economy; stimulating other business development; bringing new income into the community; and assisting manufacturing firms and production facilities located in the U.S.

Public-policy goals include revitalizing a business district of a community with a written revitalization or redevelopment plan; expanding exports; expanding small businesses owned and controlled by women, veterans, and minorities; aiding rural development; increasing productivity and competitiveness; modernizing or upgrading facilities to meet health, safety, and environmental requirements; and assisting businesses in, or moving to, areas affected by federal budget reductions, including base closings; reduction of energy consumption by at least 10%.

There are a few environmental goals as well, including increased use of sustainable design, building design that reduces the use of non-renewable resources and minimizes environmental impact; reduction in the use of greenhouse-gas-producing fossil fuels; and production of alternative and renewable forms of energy.

These are worthy goals, obviously, but businesses that qualify for 504 loans are typically more concerned with how the program affects their bottom line.

“We see ebbs and flows, just like conventional banks do, but we’re obviously in a good market right now,” Gaylord said. “This is a good opportunity for people to lock in those loan rates before they start to rise. Now is a really good time.”

There have been many of those good times since Granite State Development Corp. took root in New England 35 years ago, with a mission to help small businesses expand and grow, thereby helping the New England economy.

“It’s a very easy process,” Gaylord told BusinessWest. “I think that the bankers are comfortable with it, and look to us for guidance. We’re bankers and want to work with them.

“People ask, ‘are you competing with banks?’” she went on. “No, we don’t compete with banks, we work with them. We look at banks as our partners. And I get excited when I see the jobs and economic growth. That’s the best part.”

Joseph Bednar can be reached at [email protected]

Banking and Financial Services Sections

Adding Things Up

Nicholas LaPier, CPA

Nicholas LaPier, CPA

By Nicholas LaPier

Ah, tax reform.

As long as the U.S. has had a federal tax, candidates running for office have promised to simplify and make reforms to the tax code. These promises always fall positively on the ears of the electorate, but often end up on the cutting-room floor.

President Trump campaigned that he wanted to reform the tax code, which, in his opinion, would bring back business, and jobs, to America. In Trump’s opinion, reducing the corporate tax rates would entice American businesses to stay here and not move operations and jobs overseas. Trump also believes that reducing personal taxes that individuals pay would translate into enhanced consumer spending, which is an important element of economic growth. Finally, making sweeping reforms to the federal tax code would also simplify it, and allow for many taxpayers to easily understand and file their own taxes.

True, the federal tax code is complicated. It is hard to read and harder to understand. It may even be unfair or inequitable to some. Its many pages of rules, regulations, and interpretations require many taxpayers to hire professionals to assist them in preparing and filing their required annual tax returns. After all, it is a living document more than 100 years in the making.

But what is this they call tax simplification and reform? Is it something governance does to keep busy between the dog days of summer and the winter solstice? Is it an honest intention to create a simpler, fairer system for all of us to understand and employ? Or is it a necessary act to adjust a system of taxation that will boost our economy and create jobs?

I proffer that it is all of that. The Tax Act signed by president Trump on Dec. 22 is the most comprehensive piece of tax legislation enacted in more than 30 years. Almost all of the provisions began last week, on Jan. 1.

Here’s a quick primer.

Corporate Taxation

First, let’s address the reforms and simplification of the federal corporate tax laws.

Although not in its truest form, the new law does create, for the first time, a virtual flat tax. Strange how this nomenclature never got any media attention. After 2017, U.S. corporations will now have a flat 21% corporate tax rate, truly reform, which Washington believed would be commensurate with, or at least fairly attractive compared with, corporate tax rates around the globe. Further, the act eliminates the corporate alternative minimum tax, which goes hand in hand with the concept of a flat corporate tax rate..”

Although not in its truest form, the new law does create, for the first time, a virtual flat tax. Strange how this nomenclature never got any media attention. After 2017, U.S. corporations will now have a flat 21% corporate tax rate, truly reform, which Washington believed would be commensurate with, or at least fairly attractive compared with, corporate tax rates around the globe. Further, the act eliminates the corporate alternative minimum tax, which goes hand in hand with the concept of a flat corporate tax rate.

Other notable changes include expanding the bonus-depreciation rules, which, unlike many other parts of the act, became effective for assets purchased after Sept. 27, 2017.  The act also significantly enhances the amount of depreciation allowed on business vehicles, which, prior to 2018, was limited. An interesting non-publicized change was the full elimination of the business deduction for meals and entertainment, compared to the previously allowed 50% deduction.

All of these changes are, in fact, tax reforms, but not necessarily tax simplification. The actual process of preparing a corporate tax return is still complex, with numerous calculations, add-backs, subtractions, credits, etc. that didn’t go away with the act, as well as other sundry forms that are still required to be attached to a corporate tax return.

Since these new changes all took effect on Jan. 1, the real economic effect won’t be felt for years to come. Some pundits argue that many U.S. corporations don’t pay the maximum rates anyhow, and the reason why jobs were shifted over the borders and overseas was because of business opportunities and the lower cost of wages. Others believe that the tax savings will either transfer to shareholders as additional dividends, or, if corporations hold onto the cash, will increase the market value of their stock.

Washington wants us to believe otherwise, suggesting that overall surplus corporate money (saved vis-a-vis lower taxes) will be spent here on economic development and used to hire more people. This may be closer to the truth when you consider that smaller, closely held, and non-public corporations do not necessarily worry about shareholder value, nor have the benefits of tax credits and creative tax accounting that publicly traded corporations may have.

Personal Income Tax

In regards to personal income taxes, there were numerous changes made, but, in the interest of brevity, I will highlight those with the most impact.

Congress did give all tax filers a year-end gift by reducing the personal income tax rates, and brackets thereon, across the board. As an added bonus, the act made no changes in the tax rates for qualified dividends or long-term capital gains, keeping those lower rates in place.

At first glance, the reduced rates and other sundry changes should have a positive impact on almost everyone.

Except for the income tax-rate reductions, the biggest reform in the new Tax Act is the significant increase in the standard deduction that all filers will get. The act almost doubles the amount of the standard deduction, which will result in many taxpayers no longer itemizing their deductions. Some state senators lobbied heavily against putting a cap of $5,000 ($10,000 for a married couple) on the state and local tax (SALT) deduction, and among others, the National Assoc. of Realtors hit Congress hard against the mortgage-interest cap, and the possible change to the tax exemption on the gain on the sale of a home (which didn’t get changed). Thus, the much-publicized debates on the limits on state and local tax deductions and the mortgage-interest deduction became mostly moot points.

Additionally, filers will no longer be able to deduct unreimbursed employee expenses, which, if in excess of 2% of their adjusted gross income, would have otherwise been allowed for other itemized deductions. These few changes alone result in tax-filing simplification for millions of filers because they may now qualify for the traditional short-tax-form filing. Expect the IRS to amend the filing rules for who qualifies to use the short-form 1040-EZ compared to the long-form 1040.

The act has eliminated the personal exemptions, which in 2017 filers still have a deduction of up to $4,050 per person. To help counter the tax hit for this, the act has doubled the child tax credit from $1,000 to $2,000, and increased the amount that was refundable to a maximum of $1,400. This is a good tax benefit to qualified low-income filers with dependents. The benefit to other filers is an increase in the threshold of adjusted gross income before the child tax credit is eventually phased out entirely. This new limit is at $200,000, compared to $75,000 under prior law; for a married couple, these amounts are now $400,000, compared to $110,000 in 2017.

Aside from the adjustment to the standard deduction and the reduced tax rates, most of the other changes are far from simple, nor do they qualify as tax reform. For example, the act has a complicated formula to calculate how much of the child tax credit can be refundable, with specific criteria including what type of earned income qualifies, family size, and maximum income limits. Also, deductions that are allowed on page one of the long form, called above-the-line deductions, are still voluminous, and tricky.

Alternative minimum tax (AMT) is still in play, albeit with some minor increases to the limits thereto. Finally, if you are a shareholder in a flow-through business like a partnership or S-corporation, how you calculate the 20% deductible portion, combined with rules on limitations on owner wages and business type, is very complex.

In the end, how much each person and family saves as a result of all these reforms will vary, until an actual tax return is prepared for 2018.

Estate Taxation

Included in the Tax Act is the doubling of the estate- and gift-tax exclusion, as well as the generation-skipping tax (GST) exemption. This can also be deemed a year-end gift because, for federal tax purposes, the scope of taxpayers subject to this tax has been significantly reduced. This change alone is pure tax reform.

Affordable Care Act

Call this reform or political posturing (or both); the first major modification of the original Affordable Care Act (ACA) has become law. As part of the Tax Act, filers who do not have health insurance will no longer be assessed the healthcare penalty, otherwise known as the individual shared responsibility requirement, after 2017. Not only will this save some filers money (reform), it will definitely make their tax filing simpler, removing the very difficult-to-prepare Form 8965 from the return.

State Tax

This article has focused on the new federal Tax Act without taking into consideration the possible impact on your own state income tax. For individual filers, unless you live in one of the last seven states that have no income tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming), the many changes to the federal tax code will most likely have an impact on your own state taxes.

Many states are ‘piggyback’ states, meaning they take your federal adjusted income as a base, then have various add-backs and subtractions, before getting to their own taxable income. For example, Massachusetts never recognized the principles of bonus depreciation, which results in federal-to-state tax differences. As far as the new federal deduction for flow-through income, it will be interesting if any of the states will allow for that; it may already be provided for under existing state law, or it may take specific legislative action to adopt.

Regardless, you should take into consideration how any of the new federal provisions will impact you on your own state tax return. When in doubt, always consult a professional tax advisor.

By the time the ink has dried on this article and published, the new Tax Act will be law, and government lawyers will be putting the finishing touches on the official final regulations. Interpretations and minor fixes will surely follow, well into 2018.

Many of the new tax-law changes will expire after 2025, so expect that the next round of tax simplification and reform will be here before long.  Stay tuned.

Nicholas LaPier, CPA is the principal at Nicholas LaPier CPA PC in West Springfield; (413)732-0200; [email protected]

Banking and Financial Services Sections

Unlocking Financial Health

KeyBank’s Courtney Jinjika and Jeff Hubbard

KeyBank’s Courtney Jinjika and Jeff Hubbard

KeyBank is fairly new to the Western Mass. financial marketplace, taking over eight Hampden County branches following its acquisition of First Niagara Bank last year. But its leaders are already fluent in speaking the language of the region’s customers, who want their institutions to be customer-friendly and civic-minded. With a host of high-tech products melded with a focus on helping customers effectively use them to manage their financial health, Key seems ready to unlock more business.

It’s called HelloWallet.

“It’s an online platform that KeyBank uses to help customers make smarter, more confident financial decisions. The user first inputs information about their account balances, income, spending, demographics, and more to produce a score of sorts — a picture of where they are financially, where they want to be, and how to get there, by setting budgets, planning for retirement, and more.

“We focus on bringing financial confidence and wellness to all of our customers — individuals and business — across a broad spectrum of needs,” said Courtney Jinjika, the bank’s regional retail executive for Connecticut and Western Mass. “A key differentiator for us is HelloWallet, an online, real-time financial-assessment and planning tool, which, coupled with personalized guidance from their trusted banker, helps our clients achieve financial wellness and accomplish their goals.”

When it acquired HelloWallet last year, KeyBank saw it as one of several strategies for better connecting their clients, both retail and commercial, to helpful financial resources.

“Our focus is on our clients’ overall financial wellness and helping them make solid financial decisions,” Jinjika explained. “With HelloWallet, we integrated a tool into our system that allows clients to assess where they stand within a few components of overall financial wellness; it actually gives recommendations and feeds information back to bankers, who are able to reach out to clients and help them make difficult financial decisions and guide them to better financial wellness.”

As a digitally based tool, it also appeals to the growing set of customers who prefer resources they can access at any time, not just in a branch, said Jeff Hubbard, Key’s market president for Connecticut and Western Mass. “It’s an exciting tool to offer to customers, and a way to better focus on financial literacy.”

The theme of connection is one KeyBank touts in its marketing efforts and its services, Hubbard noted. When the institution, currently the 29th-largest bank in the U.S. by asset size, acquired First Niagara Bank in 2016, it inherited a large footprint in Western Mass. and Connecticut to complement its existing New England presence in Maine, Vermont, and the Boston area.

And if there’s one thing Hubbard understands about Western Mass., where KeyBank now operates eight branches boasting 70 employees, it’s that customers appreciate a community-focused model.

Those eight branches — in East Longmeadow, Feeding Hills, Holyoke, Ludlow, Southwick, Westfield, and two in West Springfield — have been busy introducing resources including commercial lending, residential mortgage lending, investments, wealth management, and insurance.

In doing so, Hubbard said, it’s also touting the value of “meeting customers on whatever playing field they might want to be on.”

High-tech, Personal Touch

Jinjika said bank employees are skilled at helping customers navigate the various high-tech banking options available to them, from online bill pay and remote deposit capture to the HelloWallet tool, and show them how they can use them to monitor their financial wellness. There’s also an online scheduling tool customers can use to make appointments at the branch and outline what issues they want to discuss.

After all, Hubbard said, online banking hasn’t killed branch banking, not by a longshot. It has certainly forced the branch model to evolve in the ways Jinjika described, but a street-level presence remains crucial.

“Lots of people want to visit a branch for lots of reasons,” Hubbard said. “Here, they’ll visit highly trained, experienced people who want to help them. To be successful in the Springfield market, you need to meet people anywhere they want to meet.”

A decade ago, he went on, products like remote deposit capture for businesses seemed strikingly innovative, and now clients have come to expect them as a baseline. Meanwhile, Millennials might have led the way in adopting technology that allows them to control their finances from their computers and smartphones, there’s less of a demographic breakdown today.

“Millennials get on board faster; they’re quicker adopters, but they’re targeted at everyone,” Jinjika said. “Keeping people out of the branch line is a good thing, so adoption rates are pretty strong.”

In addition, Jinjika said, the vast majority of customers seeking to make major life changes, like a home mortgage, want to sit down with a professional.

“When our clients have a concern or are making major financial decisions, they want to do that in person at the branch,” she explained. “What we find is that they’ll do their research online, but when it actually comes down to fully making that decision, they want to sit down with someone and get answers face to face.”

The same goes for commercial customers, Hubbard said, noting that Key likes to tout itself as a “Main Street bank with Wall Street capabilities,” which can leverage its investment-banking team and industry-specific bankers to bring added resources to commercial clients. We believe that these capabilities, along with our state-of-the-art cash-management services and insurance and benefit consulting services, give us a competitive advantage with our business clients.

He understands the fierce competition in a market that many analysts have called overbanked in recent years, but said loan demand is steady.

“We’re certainly getting our fair share,” he told BusinessWest. “Springfield is a wonderful market with lots of opportunities. We’re grateful to have into some very large clients, very good-sized companies in Greater Springfield, in addition to small, mom-and-pop businesses.”

Another business-minded program is [email protected], which partners with companies and provides free and discounted banking services employees at no cost to the employer. A dedicated [email protected] ‘relationship manager’ delivers a customized program on site to meet the specific needs of workers through financial-education presentations and one-on-one financial assessments.

It’s another way KeyBank aims to broaden its customer base in its existing branches, rather than having to open new branches to grow.

“We’re very happy with the branch locations we have today,” Hubbard said. “The objective is to get our employees out of the branch into the community and grow our business organically.”

Community Ties

The bank also understands that the region’s community-banking culture means community involvement on a charitable level, Hubbard said, noting that Key expects to make $100,000 in community sponsorships and charitable grants to nonprofits serving the Greater Springfield market in 2017. “We think it’s very important to support the market where we live and work. That’s something we take seriously.”

On a national level, KeyBank also released its National Community Benefits plan last year, which includes $16.5 billion in investments across the communities it serves. The commitments are part of a comprehensive blueprint for steps Key will take over the next five years.

As part of a partnership with the National Community Reinvestment Coalition, KeyBank committed to $16.5 billion in mortgage lending, small-business lending, community-development lending, and philanthropy, with the goal of stimulating job and economic growth in those communities. KeyBank has also committed to reducing neighborhood blight as well as maintenance and disposition of foreclosed properties.

Additionally, the KeyBank Foundation is committing $175 million in philanthropic investments for its traditional priorities of education and workforce development. The investments will also focus on the stabilization of urban neighborhoods and rural communities through local capacity building, affordable housing, and building technical assistance to execute locally.

Nationwide, KeyBank employees will support the plan through local service projects and board leadership. Employees will continue to be heavily engaged in their communities, with the expectation of 500,000 of additional volunteer hours over the next five years.

“Key has jumped into this in a big way,” Hubbard said, noting that the effort crosses 15 states, but each market will feel an impact. “This is a broad but very meaningful delivery of strong foundational support.”

The bank has also earned national recognition as one of Points of Light’s top 50 most community-minded companies for the last three consecutive years; a Top 50 Company for Diversity by Diversity Inc. for the last seven years, and eight annual ‘outstanding’ ratings from the Community Reinvestment Act for its levels of lending, investment, and service to low- and moderate-income communities — one of less than 10% of all U.S. banks to achieve that goal.

Those accolades further demonstrate, Jinjika noted, that KeyBank aims to be an effective partner both for customers who walk in the branch and in the communities surrounding those branches.

“We keep clients at the center of all we do,” she told BusinessWest. “We compete where some of the bigger banks won’t, and where the smaller banks can’t. We really think about the individual in front of us when we put together a package that will work for their financial wellness.”

Joseph Bednar can be reached at [email protected]