Home Posts tagged new
Opinion

Editorial 1

A year ago — and, actually, long before that — this region was awash in speculation about what the gaming industry might bring to the region and what its broad impact might be.

The industry was new to the state, and there were questions. There was also excitement, some anxiety, no shortage of opinions, and plenty of hope. A year later, most of those emotions are still in evidence, and there remain many questions.

But in the meantime, another industry has emerged that apparently has the potential to have far more reach and far more impact: cannabis.

As several different stories in this issue reveal, the cannabis industry has certainly put down roots in the four counties of Western Mass., and while it’s still too early to know for sure, it appears to have far more potential to change the landscape — in all kinds of ways — than gaming.

Why? Because this is a far-reaching industry with myriad moving parts and potential business opportunities — from cultivation to retail to real estate to, yes, a new publication (see page 6). Also, it is seemingly far more democratic.

Indeed, while the gaming industry is reserved for large, as in very large, players investing $1 billion or more, the cannabis sector offers opportunities for individuals and small groups of investors — not that getting into this business, let alone succeeding in it, would be considered easy in any way, shape, or form.

And, as Michael Kusek, founder of that publication, A Different Leaf, points out, this is one of the few industries in this state where the opportunities are in Central and Western Mass., not Boston and within the Route 128 beltway. That’s because the majority of cities and towns in this region are welcoming of this industry, while most of those surrounding Boston are not.

When Easthampton Mayor Nicolle LaChapelle said her community was “head over heels in love, I would think, with cannabis, and I don’t think that’s overstating it,” she wasn’t just speaking for many of her colleagues — remember, Holyoke’s mayor, Alex Morse, joked to a television reporter that his goal was to rename the city the ‘Rolling Paper City’ — but she was speaking about how this sector can be a real game changer in terms of everything from jobs to tax revenue to foot traffic on Main Street.

The cannabis industry is not an easy one to follow. As noted, there are a lot of moving parts, and the scene changes every month, if not every week, as new locations open, more host-community agreements are forged, and more real estate is acquired for the purpose of establishing businesses in this sector.

But as hard as it is to keep track of all that is going on, it’s a worthy endeavor, because this industry certainly bears watching. No one really knows how things will shake out as more and more locations are opened and, eventually, more states decide to follow the Bay State’s lead.

But it seems almost certain that this sector will bring more impactful change, from a business perspective, than anything this region has seen in decades.

Education

Pressing On

President-Elect Ed Wingenbach spoke at his first public press conference on Thursday, July 18 regarding the future of Hampshire College and the role he hopes to play in its success.

When asked whether he thought Hampshire College could not only maintain its accreditation but forge a long-term future, Ed Wingenbach, the recently named president of the beleaguered institution, didn’t hesitate in his response and spoke with a voice brimming with confidence.

“Yes; do you need me to say more?” he replied as the question was posed at a press conference to announce his appointment on July 18.

“I’m not at all worried about our ability to pull it off,” he went on, adding that, although he believes Hampshire College will overcome these obstacles, that certainly doesn’t mean it will be easy. “There’s a lot of hard work to be done over the next two months, six months, three years, but it’s the work that Hampshire College should always be doing.”

His confidence, he said, results from what he called “extraordinary and dedicated students, staff, faculty, alumni, and community members who all have the will to get the job done.”

Wingenbach will be the eighth president of the Amherst-based institution has appointed. An accomplished administrator, faculty leader, scholar, and proponent of liberal-arts education, he has served for the past six months as acting president of Ripon College in Wisconsin, a liberal-arts college where he has been vice president and dean of faculty and a professor of Politics and Government since 2015. Previously, he served for 15 years as an administrator and faculty leader at the University of Redlands in California.

“I’m coming to Hampshire College today and hopefully for a very long time because I think that it is the essential college in higher education,” he said at his welcoming press conference. “There is no place that has been more important to the success of the American college and university system over the last 50 years than Hampshire College.”

Hampshire’s board of trustees voted unanimously for Wingenbach’s appointment on July 12 after a formal recommendation from the presidential search committee chaired by trustee Ellen Sturgis and comprising faculty, students, staff, trustees, and alumni.

The board’s goal was to name a new president this summer to help guide the college in securing its operations, planning for its future, and preparing for the coming academic year, assignments that come as the school is literally fighting for its survival.

Indeed, the school recently received a letter from the New England Commission of Higher Education (NECHE) stating that, absent evidence of substantial progress on a number of matters, ranging from hiring a new president to developing plans for achieving ambitious goals for fundraising and rebuilding enrollment, “the commission will, at its November 2019 meeting, take an action to place the college on probation or withdraw its accreditation.”

“I’m coming to Hampshire College today and hopefully for a very long time because I think that it is the essential college in higher education. There is no place that has been more important to the success of the American college and university system over the last 50 years than Hampshire College.”

This rather stern warning comes after roughly a year of turmoil and regional and national headlines concerning the college, thrusting it into the forefront of mounting problems for smaller, independent colleges dependent largely on high-school graduates at a time when graduating classes are getting smaller and projected to get smaller still.

In recent months, Hampshire announced it will not admit a full class for this fall — in fact, only about 15 students are expected to be in what will be known as the class of 2019. There have also been layoffs, the resignations of President Miriam Nelson and several board members, and departures among the current student body.

 

Grade Expectations

Despite this steady drumbeat of bad news, in recent writings to the Hampshire community, interim President Ken Rosenthal, one of Hampshire’s founders, has been using a decidedly optimistic tone. Last month, he wrote that the school was fully committed to enrolling a full class for 2020, was making progress with an aggressive bid to raise $20 million by June 2020 and an estimated $100 million over the next five years, and was filling several key positions, including president.

Ken Rosenthal

While acknowledging this optimistic tone and focus on the future at a time when many had — and perhaps still have — grave doubts that Hampshire has a future, Rosenthal told BusinessWest, “that certainly doesn’t mean it’s going to be easy.”

Wingenbach agrees, but he has a plan.

“I am confident that we can overcome those challenges by reinvigorating the mission to innovate and lead higher education,” he said. “By becoming distinctive again, and inventing, again, new ways to think about undergraduate education, and implementing them and doing them well, we’ll restore the rightful distinctiveness of Hampshire College.”

However, both his and Rosenthal’s sentiments about the task ahead certainly not being easy were echoed by Barbara Brittingham, president of NECHE, who said Hampshire faces what she called a “heavy lift,” given both the challenges facing all colleges reliant upon high-school graduates, and the relatively young age of Hampshire’s alumni.

Wingenbach told media, professors, students, and trustees that Hampshire College is a laboratory to how to make higher education better, and the hard work that will happen over the coming months and years will set the college up for success.

Indeed, like Rosenthal, she said Hampshire is challenged to raise money and thus grow its endowment because its oldest alums are barely 70 — and probably still living and thus not bequeathing money to the college — and most alums are at an age when they are paying for their children’s college, saving for retirement, or putting their money to other uses.

Thus, the school will have to look well beyond its alumni base for support, she said. And it will also have to attract more students, a task made more difficult by recent headlines and words and phrases such as ‘probation’ and ‘possible loss of accreditation.’

“Colleges rely a lot on donations from alumni, but they often get donations from friends, people who admire the mission,” said Brittingham, adding that Hampshire will need considerable help from such friends moving forward.

This, said Wingenbach, is part of the plan. In order to reinvigorate Hampshire College, reaching out to not only alumni, but also those who are interested in Hampshire’s mission, is crucial.

“We have all kinds of resources beyond this campus to make sure that our students have access to everything they need to be successful,” he said.

 

Course of Action

The college has certainly used those resources so far. Wingenbach praised Hampshire for raising more than $9 million since February of this year, adding that this is an impressive accomplishment with the challenges they’ve faced.
But the college will need to continue to raise money at this rate in order to make ends meet.

Because Hampshire will be a much smaller school this fall — it just graduated 295 students and will bring in only 15 freshmen in September — the resulting loss of tuition and fees will result in a huge budget deficit. The projected number is $20 million, said Rosenthal, but it may be smaller depending on just how many students return to the campus this fall; the school is budgeting for 600.

“We set out two months ago to raise that $20 million by June 30, 2020, and we’re a little ahead of schedule,” said Rosenthal, adding that this schedule called for having $7 million in cash in hand by August, another $7 million by the end of December, and the final $6 million by the end of the current fiscal year, ending next June 30.

Moving forward, and, again, thinking optimistically, as the college moves closer to what Rosenthal called ‘normal size,” meaning 1,200 to 1,400 students, the budget deficits will grow smaller. Still, he projects that roughly $60 million will be needed over the next five years. When necessary capital improvements are added, the number rises to $100 million.

As Brittingham noted — as Rosenthal did himself, only with different language — this is indeed a heavy lift for a college this size.

Wingenbach says the cost structure of the college must undergo a serious adjustment in order to accomplish this ambitious goal.

“As we’re currently constituted, we spend too much money, and we don’t raise enough. That’s a fundamental reality of almost all small colleges in the entire country; we’re no different. But we have to face that reality as well,” he said. “As we’re thinking about experimentation and innovation and new ideas, we have to think about that framework within a reasonable understanding of what our budget and resources will look like two and four years from now, and live within that framework.”

This, Wingenbach said, may include an increase in tuition.

“We have to be thinking really carefully about what our likely students are willing to pay for this kind of an education,” he said, adding that the average Hampshire student graduates with about $24,000 in debt, an extraordinarily low figure for a four-year education. “I think it’s likely that tuition goes up, but I don’t think it’s likely that it goes up a lot in any given year.”

 

Critical Crossroads

Whether all or any of this — from the early progress on fundraising to Hampshire’s relevance in a changing world — will have any impact on students’ decisions on whether to return to the campus, or on NECHE’s upcoming decision on accreditation, remain to be seen. And they will both go a long way toward determining the college’s future.

“I think we have a really good story to tell that I think is compelling to people,” Wingenbach said, adding that another critical part of reinventing the school is going to be reminding people why the school is so important in the first place.

“One of the big advantages Hampshire has is that the value of an education here is easy to articulate,” he went on. “Colleges struggle to attract students who can pay a slightly higher rate if they have no argument as to why you should do that. Hampshire has a great argument for why you should do that.”

Reminding not only those within the community, but also those inside Hampshire College, of all this is a critical step in maintaining the energy Wingenbach says is crucial to get the school back on top. This includes recognizing the hard times in order to get to the good.

“There has been a lot of trauma here,” he said. “This has been a very hard six months to a year. Part of engaging people is recognizing that, both within the college community and with the public. It doesn’t change the fact that this has been a really hard year, and people have struggled. We recognize that and say, ‘now we’re going to continue to struggle, but we’re going to do something productive about it.’”

Kayla Ebner can be reached at [email protected]

Banking and Financial Services

Understanding Section 199A

By Kristina Drzal-Houghton, CPA, MST

Kristina Drzal Houghton

Kristina Drzal Houghton

At the close of every year, most individuals and business owners begin to think about taxes. Currently, many are anxious to find out what their liability will look like considering the law change known as the Tax Cuts and Jobs Act (TCJA).

One major provision is a new tax deduction for passthrough entities (S-corporations, partnerships, and sole proprietorships) under Sec. 199A. The deduction generally provides owners, shareholders, or partners a 20% deduction on their personal tax returns on their qualified business income (QBI). Various limitations apply based on the type of business operated and the amount of income the business has.

While the calculation of the deduction amount is beyond the scope of this discussion, a summary follows of the limitations that apply to specified service trades or businesses (SSTBs) and other benefits which may be available.

The Internal Revenue Code has historically treated professional service businesses more harshly than any other type of business, and this continues with the Sec. 199A deduction. For example, before the TCJA, professional service corporations were taxed at a flat 35% tax rate rather than the graduated tax rates applicable to other C-corporations. Under the new rules, the same corporations will benefit from a flat 21% tax. Pass-through entities did not fare as well; the 20% deduction does not apply to certain enumerated SSTBs if the taxpayer’s taxable income is above certain threshold amounts.

The threshold amounts are $315,000 for taxpayers filing jointly and $157,500 for all other taxpayers, with a deduction-phaseout range, or limitation phase-in range, of $100,000 and $50,000, respectively, above these amounts.

SSTBs are broken into two distinct categories:

1.Trades or businesses performing services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of that trade or business is the reputation or skill of one or more of its employees (specifically excluded are engineering and architecture); or

2. Any trade or business that involves the performance of services that consist of investing and investment management, trading, or dealing in securities, partnership interests, or commodities.

QBI also does not include compensation, even compensation paid to the shareholders of an S-corporation, or any guaranteed payments paid to a partner for services rendered with respect to the trade or business, or any payment to a partner for services rendered with respect to the trade or business. As a result, if your practice is a partnership that pays out all of its income in guaranteed payments, you may want to switch to a model that instead specially allocates that income to the partners, as a special allocation of income is eligible for the 20% deduction, while the guaranteed payments are not.

This could allow individual partners whose income falls below the above thresholds to benefit from the QBI deduction even if the activity is otherwise an SSTB.

What happens if a trade or business has multiple lines of businesses, where one of the lines is an SSTB? The regulations include a de minimis rule for this situation. If a taxpayer has $25 million or less in gross receipts for the tax year from SSTB activities, it will not be considered an SSTB if less than 10% of the receipts are generated by the SSTB activity. If the taxpayer has more than $25 million in gross receipts, it will not be an SSTB if less than 5% of those receipts are generated by the SSTB activity.

The regulations do provide a couple of anti-abuse provisions to prevent taxpayers from incorrectly trying to take advantage of the tax law. The first relates to a common question I am often asked at networking functions where an employee now desires to be treated as an independent contractor to take advantage of this new tax deduction. The regulations provide that former employees are presumed to still be employees even if subsequently treated as an independent contractor. The IRS provides several tests and factors to consider if a worker is an independent contractor or employee which should be considered by an employer before changing a worker’s classification.

The second anti-abuse provision has to do with related party businesses. Here the IRS has stated that, if a business that otherwise wouldn’t be considered an SSTB has 50% or more common ownership with an SSTB (including related parties) and is providing substantially all its property or services to the related SSTB, it will be considered an SSTB. ‘Substantially all’ is defined to be 80% or more of its total property or services to the related SSTB. This is designed to prevent taxpayers from shifting income to non-SSTB businesses by adjusting the purchase price on related party sales to take advantage of the tax break.

There are several other provisions of the TCJA that benefit all businesses regardless of form. These provisions are all effective Jan. 1, 2018 unless otherwise indicated and include:

• The maximum amount allowed to be expensed under Code Section 179 is increased to $1 million, and the phaseout threshold is increased to $2.5 million. These amounts are indexed for inflation after 2018.

• The definition of qualified real property under Code Section 179 is expanded to include certain depreciable personal property used in the lodging industry, as well as certain improvements to nonresidential real property after the date such property was placed in service, such as roofs; heating, ventilation, and air-conditioning property; fire protection and alarm systems; and security systems.

• For property acquired and placed in service after Sept. 27, 2017 and before Jan. 1, 2023, the first-year deduction is increased to 100%.

• After 2022, the deduction percentage phases down by 20% per year until it sunsets after 2026.

• Most states, including Massachusetts, have decided to decouple from the new bonus-depreciation rules.

• No deduction is allowed for entertainment, amusement, or recreation; membership dues for a club organized for business, pleasure, recreation, or other social purposes; or a facility used in connection with any of the above.

• Costs for entertainment expenses such as tickets to sporting events, taking clients to play golf, and similar activities are no longer deductible.

• Meals provided for the convenience of the employer, through an eating facility or other de minimis food and beverage, are no longer 100% deductible, but now fall into the 50% category. They become non-deductible after 2025.

• Qualified transportation fringe benefits provided to employees continue to be excluded from the employees’ income but are no longer deductible by the business.

• Between Jan. 1, 2018 and Dec. 31, 2019, the TCJA allows a credit of 12.5% of the amount of wages paid to qualifying employees during any period during which such employees are out on family and medical leave, provided that the rate of payment is 50% of the wages normally paid to an employee. The credit increases by 0.25% (but not above 25%) for each percentage point by which the wages exceed 50%.

• Wage expense is reduced when the credit is taken as an alternative.

On Jan. 18, the IRS released guidance on many Sec. 199A issues when it issued final regulations. The IRS noted that the final regulations had been modified somewhat from the proposed regulations issued last August as a result of comments it received and testimony at a public hearing it held. The final regulations apply to tax years ending after their publication in the Federal Register; however, taxpayers may rely on the proposed regulations for tax years ending in 2018.

The combination of the proposed regulation and final regulations has altered some of the planning techniques originally thought to increase the tax benefits available to SSTBs under the provisions of Sec. 199A. If your business previously adopted planning techniques before the August and January regulations, you should revisit the projected benefits with your tax adviser.

Kristina Drzal-Houghton, CPA, MST is a partner at Holyoke-based Meyers Brothers Kalicka and director of the firm’s Taxation Division; (413) 535-8510.

Construction

New Life for an Old Building

Begun almost two years ago, a massive, $50 million project to convert the structure at Springfield Technical Community College, formerly part of the Springfield Armory complex, known as Building 19 into a new learning commons is moving rapidly toward its conclusion. Used more than 150 years ago to warehouse gun-barrel stocks, the building will become home to a wide variety of facilities and services — from the library to the admissions office; from common areas to learning spaces — and should be ready for occupancy late this fall, said Socha.

In these times, many people will be working remotely. In addition to accessing BusinessWest online, readers may wish to add their home address. To do this, e-mail [email protected], visit  https://businesswest.com/contact-us/subscribe/, or call 413.781.8600.