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Some Concerning Trends Continued in 2023 — but There Was Good News, Too

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Features Special Coverage

A Year of Challenge and Progress

By Joseph Bednar and George O’Brien

Way Finder CEO Keith Fairey

Way Finder CEO Keith Fairey says the housing crisis has been years in the making and results from several factors, including a lack of investment in new housing.

One one hand, every year removed from the pandemic of 2020 is a step toward normalcy, and, for the most part, business rolled on in 2023 — but the effects of that pivotal year still linger, through persistent challenges like inflation, workforce shortages, the deepening roots of remote work, and behavioral-health crises.

But other trends have emerged as well, from a harsher landscape for cannabis businesses to actual movement on east-west rail, to positive developments in downtown Springfield.

As 2024 dawns, undoubtedly bringing a new host of challenges and opportunities, BusinessWest presents its year in review: a look back at some of the stories and issues that shaped our lives, and will, in many cases, continue to do so.

 

The Housing Crisis Deepens

One of the more poignant stories of 2023 was a deepening housing crisis that is touching virtually every community in this region, the state, and many parts of the country.

“We got here over decades of underinvesting in housing production nationally, and not tuning that production to the needs and demographic changes of communities,” Keith Fairey, president and CEO of Springfield-based Way Finders, told BusinessWest in an interview this fall, adding that a resolution to this crisis won’t come quickly or easily, either.

“One of the things we have to do is make sure Massachusetts remains a competitive state for years to come. And one of the main indicators of whether you are competitive is ‘can people afford to live in this state?”

The major challenges involve not only creating more housing, because not much was built over the past few decades, but housing that fals into the ‘affordable’ category.

Indeed, state Rep. John Velis, a member of the Senate’s Housing Committee, said there are many side effects from the housing crisis, especially when it comes to the state’s ability to retain residents. “One of the things we have to do is make sure Massachusetts remains a competitive state for years to come. And one of the main indicators of whether you are competitive is ‘can people afford to live in this state?’”

 

Inflation and Interest Rates

The Fed was on a mission in 2023 — to tame inflation but without putting the country into recession, as it famously did in the ’80s. By and large, it was mission accomplished.

Indeed, the latest data on inflation showed a 3% increase over last year in November, a significant improvement on the numbers from late last year and early this year. Meanwhile, the country seems to have avoided a recession, with the economy expanding at a seasonally adjusted, annualized rate of 5.2% in the third quarter, after generating 2.2% annualized growth in the first quarter and 2.2% in the second quarter. In short, the economy actually accelerated, rather than slowing down, due to persistently strong consumer spending.

Efforts to stem inflation by raising interest rates were not without consequences, though, as the housing market cooled tremendously, if not historically. And commercial lending cooled as well, as many business owners took a wait-and-see approach with regard to where interest rates were headed.

 

New Challenges for Cannabis

Is the ‘green rush’ over for the cannabis industry in Massachusetts? If so, the Bay State is simply following the pattern of every other state that legalizes the drug.

According to that well-told story, the first dispensaries on the scene are bouyed by a favorable supply-and-demand equation — and long lines of customers. But as the market is flooded with competitors — not only locally, but from across state lines — not everyone survives, as a series of business closings this year demonstrates. In fact, according to the Cannabis Control Commission, 16 licenses in Massachusetts have been surrendered, not been renewed, or been revoked by the agency.

The heightened competition has caused retail prices to plummet for an industry already beset by profit-margin challenges. Unfavorable federal tax laws surrounding the growth, production, and sale of cannabis, coupled with local and state tax obligations and continued federal roadblocks to financing, transport, and other aspects of business have made it increasingly difficult to turn a profit. On the latter issue, federal decriminalization would ease the challenges somewhat, but progress there has been frustratingly slow.

Steven Weiss, shareholder at Shatz, Schwartz and Fentin

Steven Weiss, shareholder at Shatz, Schwartz and Fentin, says he’s surprised lawmakers haven’t moved more quickly toward decriminalizing cannabis on the federal level.

Workforce Challenges Continue

While many businesses and institutions, including the region’s hospitals, reported some progress in 2023 when it comes to attracting and retaining talent, workforce issues persisted in many sectors, especially hospitality.

Indeed, across the region, many restaurants have been forced to reduce the number of days they are open, and some banquet facilities have been limiting capacity due to challenges with securing adequate levels of staff.

Those are some of the visible manifestations of a workforce crisis that started during the pandemic and has lingered for a variety of reasons, from the retirement of Baby Boomers to an apparent lack of willingness to accept lower-wage positions in service businesses.

The ongoing crisis has led to stiff battles for help in certain sectors, including manufacturing, the building trades, engineering, and healthcare, among others, resulting in higher wages, more benefits, and greater flexibility when it comes to where and when people work, which brings us to another of the big stories in 2023…

 

Remote Work, Hybrid Schedules Gain More Traction

While some larger employers succeeded in bringing everyone back to the office in 2023, most have decided not to even try. Indeed, there was more evidence in 2023 that remote work and hybrid schedules have become a permanent part of the workplace landscape.

In interviews with employers large and small, a persistent theme on this topic has been the need to be flexible when it comes to schedules, and especially where people work. Many businesses, from banks to architecture firms to financial-services companies, have found that employees can be effective and productive working remotely, with many favoring a hybrid schedule that brings people to the office a few days a week. Such flexibility makes employees happier, they said, making it easier to attract and retain talent.

This pattern is causing some anxiety in the commercial office market amid speculation that companies will be seeking smaller spaces moving forward, but the full impact of the shift to remote work and hybrid schedules may not be known for years.

 

Movement on East-west Rail

This story might continue to inch down the tracks, so to speak, for years before the engine really starts moving, but after many years of debate, planning, and crunching the numbers, actual progress is emerging in the effort to connect Pittsfield with Boston by rail, with stops in Springfield, Palmer, and Worcester, among others.

“We can also make progress in breaking cycles of intergenerational poverty by helping residents complete their higher-education credentials so they can attain good jobs and build a career path.”

The big news this past fall was a federal grant of $108 million to Massachusetts for rail infrastructure upgrades, and Gov. Maura Healey also signed off on $12.5 million in DOT funding in the state’s FY 2024 budget toward the effort.

The additional east-west service would complement passenger trains now running north-south through Springfield’s Union Station, offering access to points from Greenfield to New Haven.

“The facts are simple: improving and expanding passenger rail service will have a tremendous impact on regional economies throughout Massachusetts,” U.S. Rep. Richard Neal said. “That is why we will continue to invest in a project whose framework has the potential to serve as a model for expanding passenger rail service across the country.”

 

Free Community College

Almost 2 million Massachusetts residents are over age 25 without a college degree. MassReconnect aims to change that, by offering free tuition and fees — as well as an allowance for books and supplies — at any of Massachusetts’ community colleges for residents over age 25.

Gov. Maura Healey pitched it as a strategy to generate more young, skilled talent in the workplace at a time when businesses are struggling to recruit and retain employees (more on that later). “We can also make progress in breaking cycles of intergenerational poverty by helping residents complete their higher-education credentials so they can attain good jobs and build a career path,” she added.

New HCC President George Timmons

New HCC President George Timmons says “community colleges are, to me, a great pathway to a better life.”

Holyoke Community College President George Timmons called the initiative “an exciting moment for HCC and all Massachusetts community colleges,” adding that “MassReconnect will enable our community colleges to do more of what we do best, which is serve students from all ages and all backgrounds and provide them with an exceptional education that leads to employment and, ultimately, a stronger economy and thriving region.”

 

New Higher-education Leadership

Speaking of Timmons, he was among the new presidents at the region’s colleges and universities, taking the the reins from Christina Royal, who had been at HCC since January 2017. Timmons was previously provost and senior vice president of Academic and Student Affairs at Columbia Greene Community College in Hudson, N.Y.

Meanwhile, Danielle Ren Holley, a noted legal educator and social-justice scholar, became the first Black woman in the 186-year history of Mount Holyoke College to serve as permanent president. Since 2014, Holley had served as dean and professor of Law at Howard University School of Law.

And at UMass Amherst, Chancellor Kumble Subbaswamy stepped down after 11 years leading the university, to be succeeded by Javier Reyes, who had been serving as interim chancellor at the University of Illinois Chicago.

“You’re not coming in to repair something, but to build on the shoulders of giants — and that is a very attractive opportunity,” Reyes said. “You’re not trying to catch up; you’re really trying to move and set the direction and be a forward leader. It comes with more pressure, but it’s more exciting.”

 

Thunderous Impact for the T-Birds

The Springfield Thunderbirds released the results of an economic-impact study conducted by the UMass Donahue Institute that shows the team’s operations have generated $126 million for the local economy since 2017.

The study included an analysis of team operations data, MassMutual Center concessions figures, a survey of more than 2,000 T-Birds patrons, and interviews with local business owners and other local stakeholders. Among its findings, the study shows that the T-Birds created $76 million in cumulative personal income throughout the region and contributed $10 million to state and local taxes.

The impact on downtown Springfield businesses is especially profound. Seventy-eight percent of T-Birds fans spend money on something other than hockey when they go to a game, including 68% who are patronizing a bar, restaurant, or MGM Springfield. The study also found that median spending by fans outside the arena is $40 per person on game nights and that every dollar of T-Birds’ revenue is estimated to yield $4.09 of additional economic activity in the Pioneer Valley. Meanwhile, since the team’s inaugural season, it has doubled the number of jobs created from 112 in 2017 to 236 in 2023.

 

Big Y Opens Downtown

In fact, despite the speed bump posed by the pandemic, downtown Springfield seems to have some momentum again. One of the more intriguing stories of 2023 was the opening during the summer of a scaled-down Big Y supermarket on the ground floor of Tower Square.

The new Big Y Express

The new Big Y Express represents an imaginative use of ARPA funds, addresses a food desert, and contributes to momentum in downtown Springfield.

The development was noteworthy for several reasons. First, it continued the reimagination of Tower Square, which now boasts the Greater Springfield YMCA, White Lion Brewing, two colleges, and other institutions. It also brings a supermarket to what had been a food desert. And it represents an imaginative, community-building use of ARPA funds.

The store opened its doors in June to considerable fanfare, and early results have been solid, with the store becoming a welcome addition to the downtown landscape. Combined with the Thunderbirds’ success, some of MGM Springfield’s strongest revenue months, and the ongoing residential development at the former Court Square Hotel, there’s a lot to be excited about.

 

New Home Sought for ‘Sick Courthouse’

Not all downtown news emerged from a positive place. Another developing story in 2023 was the ongoing work to secure a replacement for the Roderick Ireland Courthouse on State Street in Springfield, whose dilapidated conditions have been under scrutiny for years and have earned it the nickname the ‘sick courthouse,’ because many who have worked there have contracted various illnesses.

Gov. Maura Healey has called for investing $106 million over a five-year period to construct a new justice center in Springfield, and in November, the Healey administration issued an official request for proposals involving a least two developable acres on which to build a new courthouse. Proposals are due Jan. 31.

While redevelopment of the current site remains an option, Springfield officials are intrigued by the possibility of building not only a new courthouse, but also redeveloping the current site, which is right off I-91 in the heart of downtown.

 

Weather Challenges for Farmers

It’s called the Natural Disaster Recovery Program for Agriculture, and it exists because Mother Nature hit Massachusetts — in particular, its farmers — hard in 2023.

The state program provides financial assistance to farmers who suffered crop losses as a result of any of three natural disasters: the Feb. 3-5 deep freeze that impacted a large amount of peach and stone-fruit production, the May 17-18 frost that impacted a large amount of apple production and vineyards, and the July 9-16 rainfall and flooding that impacted a large amount of vegetable crops, field crops, and hay and forage crops.

But the government wasn’t alone in the effort to help farmers sustain this triple body blow. Area banks and other oranizations created funds, as did philanthropist Harold Grinspoon — a long-time and notable advocate for farmers through his foundation’s Local Farmer Awards — swiftly pledged $50,000 toward flood-relief efforts following the July rains, distributing checks to 50 farmers impacted by the floods.

 

Behavioral Health at the Forefront

In August, Baystate Health and Lifepoint Health celebrated the opening of Valley Springs Behavioral Health Hospital, a 122,000-square-foot, four-story facility in Holyoke featuring 150 private and semi-private rooms for inpatient behavioral healthcare for adults and adolescents.

It’s yet another development — the opening of MiraVista Behavioral Health Center in Holyoke in 2021 was another one — that aims to fill an access gap in behavioral health, at a time when the mental-health and addiction needs remain high. The pandemic caused a spike in both, the effects of which are still being felt today.

Dr. Mark Keroack, president and CEO of Baystate Health, said Valley Springs increases the inpatient behavioral-health capacity in the region by 50%. “Until now, about 30% of behavioral-health patients needing care would have to go outside the region. Valley Springs Behavioral Health Hospital will allow us to provide top-quality care for more patients right here in Western Massachusetts.”

 

Holyoke Celebrates Its 150th

One of the more fun stories of 2023 was Holyoke’s year-long 150th-anniversary celebration. BusinessWest printed a special edition in March to coincide with the St. Patrick’s Day parade, which included stories and photos that celebrated the past and present, while speculating on the future. The many interviews captured the unique essence and character of Holyoke, a close-knit community with a proud history and many traditions.

“There’s been a lot of change over the years, but what hasn’t changed is the spirit of the people,” Jim Sullivan, president of the O’Connell Companies and a Holyoke native, said. “There is a very proud heritage in Holyoke, and it still exists today.”

Said Gary Rome, another native of the Paper City and owner of Gary Rome Auto Group, “there’s a saying … as Holyokers, we can talk bad about Holyoke, but you can’t talk bad about Holyoke.”

Legislation Continues to Impact Strategies for Individuals, Businesses

By Contributor
tax planning 2022
Banking and Financial Services Special Coverage

Year-end Tax Planning

By Kristina Drzal Houghton, CPA, MST

tax planning 2022

As another tumultuous year draws to a close, both individuals and small-business owners are advised to assess their current tax situation, with an eye on maximizing available tax breaks and avoiding potential tax pitfalls. Planning should be based on the latest laws of the land.

Just look at the significant legislation enacted in recent years. Following the massive Tax Cuts and Jobs Act (TCJA) of 2017, the Coronavirus Aid, Relief, and Economic Security (CARES) Act addressed various pandemic-related issues in 2020. In quick succession, the Consolidated Appropriations Act (CAA) extended certain CARES Act provisions and modified others, while the American Rescue Plan Act (ARPA) created even more tax-saving opportunities in 2021.

This series of new laws culminated in the Inflation Reduction Act (the IRA), passed in August 2022. The IRA, which is generally effective next year, includes several provisions that could have a big tax impact on individuals and business entities.

Kristina Drzal Houghton

Kristina Drzal Houghton

“We still might not be done. More proposed legislation has been introduced in Congress. If another new law featuring tax provisions is enacted before 2023, it may require you to revise your year-end tax-planning strategies.”

And we still might not be done. More proposed legislation has been introduced in Congress. If another new law featuring tax provisions is enacted before 2023, it may require you to revise your year-end tax-planning strategies.

 

BUSINESS TAX PLANNING

 

Depreciation-based Deductions

As we head into year-end, a business may benefit from one or more of three depreciation-based tax breaks: the Section 179 deduction; first-year ‘bonus’ depreciation; and regular depreciation. In consideration of this, consider the following:

Place qualified property in service before the end of the year. If your business does not start using the property before 2023, it is not eligible for these tax breaks.

Section 179 deduction: under Section 179 of the tax code, a business may ‘expense’ (i.e., currently deduct) the cost of qualified property placed in service any time during the year. The maximum annual deduction for 2022 is $1.08 million and is phased out on a dollar-for-dollar basis when total additions exceed $2.7 million. Be aware that the Section 179 deduction cannot exceed the taxable income. This could limit your deduction for 2022.

First-year bonus depreciation: the TCJA authorized a 100% first-year bonus depreciation deduction through 2022. This includes used, as well as new, property. Be aware that most states do not allow this special bonus depreciation.

Regular depreciation: if any remaining acquisition cost remains, the balance may be deducted over time under the Modified Accelerated Cost Recovery System (MACRS).

If you buy a heavy-duty SUV or van for business, you may claim a first-year Section 179 deduction of up to $25,000. The ‘luxury car’ limits do not apply to certain heavy-duty vehicles.

The first-year bonus depreciation deduction is scheduled to phase out over five years, beginning in 2023. Take full advantage while you can.

 

Business Meals

Previously, a business could deduct 50% of the cost of its qualified business entertainment expenses. However, the deduction for entertainment costs, including strictly social meals, was eliminated by the TCJA beginning in 2018.

The ARPA doubles the usual 50% deduction for allowable meals to 100% for food and beverages provided by restaurants in 2021 and 2022. This tax break is not expected to be extended.

 

Business Repairs

As more remote workers return to your regular workplace, the business may need to fix up the place. While expenses spent on making repairs are currently deductible, the cost of improvements to business property must be capitalized.

When appropriate, complete minor repairs before the end of the year. The deductions can offset taxable income in 2022.

As a rule of thumb, a repair keeps property in efficient operating condition, while an improvement prolongs the life of the property, enhances its value, or adapts it to a different use. For example, fixing a broken window is a repair, but the addition of a new wing to a business building is treated as an improvement.

 

State Income Taxes

Many states, including Massachusetts, have enacted so-called ‘work-arounds’ whereby flow-through entities such as Subchapter S corporations and partnerships can elect to pay the state tax at the entity level on behalf of the shareholders. The benefit comes from reduced federal taxable income flowing to the shareholder, which serves to circumvent the $10,000 cap for state and local taxes when calculating itemized deduction, which is discussed later. Most states do not give a dollar-for-dollar credit for the tax paid by the entity, but the federal tax benefit is typically larger than the reduced state credit.

The actual benefit will vary for each shareholder or parter and should be reviewed to determine the actual savings. If deemed to be beneficial, don’t miss any deadlines for electing to pay these taxes.

 

Miscellaneous

Stock up on routine supplies (especially if they are in high demand). If you buy the supplies in 2022, they are deductible in 2022 — even if they are not used until 2023.

If you accrue in 2022 but pay year-end bonuses to employees in 2023, the amounts are generally deductible by an accrual-basis company in 2022 and taxable to the employees in 2023. A calendar-year company operating on the accrual basis may be able to deduct bonuses paid as late as March 15, 2023 on its 2022 return.

Keep records of collection efforts (e.g., phone calls, emails, and dunning letters) to prove debts are worthless. This may allow you to claim a bad-debt deduction.

 

INDIVIDUAL TAX PLANNING

Itemized Deductions

Due to several related provisions in the TCJA, generally effective for 2018 through 2025, more individuals are claiming the standard deduction in lieu of itemizing deductions.

Make a quick analysis of your situation. Depending on the results, you may decide to accelerate certain expenses into 2022 or postpone them to 2023.

For instance, you may want to ‘bunch’ charitable donations in a year you expect to itemize deductions. (There is more on charitable deductions below.) Similarly, you might reschedule physician or dentist visits to provide the maximum medical deduction. The deduction for those expenses is limited to the excess above 7.5% of your adjusted gross income (AGI). If you do not have a reasonable shot at deducting medical and dental expenses in 2022, you might as well postpone non-emergency expenses to 2023.

Note that the TCJA made other significant changes to itemized deductions. This includes a $10,000 annual cap on deductions for state and local tax (SALT) payments and suspension of the deduction for casualty and theft losses (except for qualified disaster-area losses). Since a repeal or modification of this cap is unlikely for 2022, wait to pay state estimates or real-estate taxes until January 2023 if they are not due in December.

The standard deduction for 2022 is generally $12,950 for single filers and $25,900 for joint filers.

 

Charitable Donations

If you still expect to itemize deductions in 2022, you may benefit from contributions to qualified charitable organizations made within generous tax-law limits.

Consider stepping up your charitable gift giving at year-end. As long as you make a donation in 2022, it is deductible on your 2022 return, even if you charge the donation by credit card as late as Dec. 31.

Note that the deduction limit for monetary contributions was increased to 100% of AGI for 2021, but the limit reverted to 60% of AGI for 2022. Nevertheless, this still provides plenty of flexibility for most taxpayers. Any excess may be carried over for up to five years.

Furthermore, if you donate appreciated property held longer than one year (i.e., it would qualify for long-term capital-gain treatment if sold), you can generally deduct an amount equal to the property’s fair market value (FMV). But the deduction for short-term capital-gain property is limited to your initial cost. Your annual deduction for property donations generally cannot exceed 30% of your AGI. As with monetary contributions, any excess may be carried over for up to five years.

The CARES Act established a maximum deduction of $300 for charitable donations by non-itemizers in 2020. The special deduction was then extended to 2021 and doubled to $600 for joint filers. As of this writing, this tax break is not available in 2022.

 

Electric Vehicle Credits

The IRA greenlights tax credits for purchasing electric vehicles and plug-in hybrids over the next few years. But certain taxpayers will not qualify. Map out your plans accordingly.

Notably, the IRA includes the following changes:

The credit cannot be claimed by a single filer with a modified adjusted gross income (MAGI) above $150,000 or an MAGI of $300,000 for joint filers.

The credit is not available for most passenger vehicles that cost more than $55,000, or $80,000 for vans, sports utility vehicles, and pickup trucks.

The vehicle must be powered by batteries whose materials are sourced from the U.S. or its free-trade partners and must be assembled in North America.

The current threshold of 200,000 vehicles sold by a manufacturer is eliminated.

In addition, the IRA authorizes a credit of up to $4,000 for used vehicles if you are a single filer with an MAGI of no more than $75,000, or $150,000 for joint filers.

 

Residential Energy Credits

The IRA generally enhances the residential energy credits that are currently available to homeowners. Under the new law, you may benefit from two types of residential energy credits:

1. The 30% ‘residential clean-energy credit’ can generally be claimed for installing solar panels or other equipment to harness renewable energy like wind, geothermal energy, and biomass fuel. This credit, which was scheduled to phase out and end after 2023, is preserved at 30% from 2022 through 2032 before phasing out.

2. The 30% ‘non-business energy property credit’ can generally be claimed for up to $1,200 of the cost of installing energy-efficient exterior windows, skylights, exterior doors, water heaters, and other qualified items through 2032 before phasing out. For 2022, the credit remains at 10% with a maximum of $500.

 

Miscellaneous

Pay a child’s college tuition for the upcoming semester. The amount paid in 2022 may qualify for one of two higher education credits, subject to phaseouts based on your MAGI.

Avoid an estimated tax penalty by qualifying for a safe-harbor exception. Generally, a penalty will not be imposed if you pay 90% of your current year’s tax liability or 100% of your prior year’s tax liability (110% if your AGI exceeded $150,000).

Minimize the kiddie-tax problem by having your child invest in tax-deferred or tax-exempt securities. For 2022, unearned income above $2,300 that is received by a dependent child under age 19 (or under age 24 if a full-time student) is taxed at the top tax rate of the parents.

Empty out flexible spending accounts (FSAs) for healthcare or dependent-care expenses if you will forfeit unused funds under the ‘use-it-or-lose it’ rule. However, your employer’s plan may provide a carryover to 2023 or a two-and-a-half-month grace period.

Make home improvements that qualify for mortgage-interest deductions as acquisition debt. This includes loans made to substantially improve your principal residence or one other home. Note that the TCJA suspended deductions for home-equity debt for 2018 through 2025.

If you own property damaged in a federal disaster area in 2022, you may qualify for quick casualty loss relief by filing an amended 2021 return. The TCJA suspended the deduction for casualty losses for 2018 through 2025, but retained a current deduction for disaster-area losses.

 

FINANCIAL TAX PLANNING

Capital Gains and Losses

Frequently, investors ‘time’ sales of assets like securities at year-end to produce optimal tax results. It is important to understand the basic tax rules.

For starters, capital gains and losses offset each other. If you show an excess loss for the year, it offsets up to $3,000 of ordinary income before being carried over to the next year. Long-term capital gains from sales of securities owned longer than one year are taxed at a maximum rate of 15% or 20% for certain high-income investors. Conversely, short-term capital gains are taxed at ordinary income rates reaching as high as 37% in 2022.

Review your investment portfolio. If it makes sense, you may harvest capital losses to offset gains realized earlier in the year or cherry-pick capital gains that will be partially or wholly absorbed by prior losses.

 

Net Investment Income Tax

Investors should account for the 3.8% tax that applies to the lesser of net investment income (NII) or the amount by which MAGI for the year exceeds $200,000 for single filers or $250,000 for joint filers. The definition of NII includes interest, dividends, capital gains, and income from passive activities, but not Social Security benefits, tax-exempt interest, and distributions from qualified retirement plans and IRAs.

Make an estimate of your potential liability for 2022. Depending on the results, you may be able to reduce the tax on NII or avoid it altogether.

 

Required Minimum Distributions

As a general rule, you must receive required minimum distributions (RMDs) from qualified retirement plans and IRAs after reaching age 72 (recently raised from age 70½). The amount of the distribution is based on IRS life-expectancy tables and your account balance at the end of last year.

Arrange to receive RMDs before Dec. 31. Otherwise, you will have to pay a stiff tax penalty equal to 50% of the required amount (less any amount you have received) in addition to your regular tax liability.

Do not procrastinate if you have not arranged RMDs for 2022 yet. It may take some time for your financial institution to accommodate these transactions.

Conversely, if you are still working and do not own 5% or more of the business employing you, you can postpone RMDs from an employer’s qualified plan until your retirement. This ‘still working exception’ does not apply to RMDs from IRAs or qualified plans of employers for whom you no longer work.

 

Installment Sales

Normally, when you sell real estate at a gain, you must pay tax on the full amount of the capital gain in the year of the sale.

If you sell it under an arrangement qualifying as an installment sale, the taxable portion of each payment is based on the gross profit ratio, which is determined by dividing the gross profit from the real-estate sale by the price.

Not only does the installment sale technique defer some of the tax due on a real estate deal, it will often reduce your overall tax liability if you are a high-income taxpayer. That is because, by spreading out the taxable gain over several years, you may pay tax on a greater portion of the gain at the 15% capital-gain rate as opposed to the 20% rate.

If it suits your purposes (e.g., you have a low tax year), you may ‘elect out’ of installment sale treatment when you file your return.

 

Estate and Gift Taxes

During the last decade, the unified estate- and gift-tax exclusion has gradually increased, while the top estate rate has not budged. For example, the exclusion for 2022 is $12.06 million, the highest it has ever been. (It is scheduled to revert to $5 million, plus inflation indexing, in 2026.)

In addition, you can give gifts to family members that qualify for the annual gift-tax exclusion. For 2022, there is no gift-tax liability on gifts of up to $16,000 per recipient (up from $15,000 in 2021). The limit is $32,000 for a joint gift by a married couple.

You may ‘double up’ by giving gifts in both December and January that qualify for the annual gift-tax exclusion for 2022 and 2023, respectively. The IRS recently announced that the limit for 2023 is $17,000 per recipient.

 

Miscellaneous

Watch out for the ‘wash sale’ rule that disallows losses from a securities sale if you reacquire substantially identical securities within 30 days. Wait at least 31 days to buy them back.

Contribute up to $20,500 to a 401(k) in 2022 ($27,000 if you are age 50 or older). If you clear the 2022 Social Security wage base of $147,000 and promptly allocate the payroll-tax savings to a 401(k), you can increase your deferral without any further reduction in your take-home pay.

Weigh the benefits of a Roth IRA conversion, especially if this will be a low-tax year. Although the conversion is subject to current tax, you generally can receive tax-free distributions in retirement, unlike taxable distributions from a traditional IRA.

Skip this year’s RMD if you recently inherited an IRA and are required to empty out the account within 10 years. Under new IRS guidance, there is no penalty if you fail to take RMDs for 2021 or 2022. The IRS will issue final regulations soon.

If you rent out your vacation home, keep your personal use within the tax-law boundaries. No loss is allowed if personal use exceeds 14 days or 10% of the rental period.

Consider a qualified charitable distribution (QCD). If you are age 70½ or older, you can transfer up to $100,000 of IRA funds directly to a charity. Although the contribution is not deductible, the QCD is exempt from tax. This may improve your overall tax picture.

 

Conclusion

This year-end tax-planning article is based on the prevailing federal tax laws, rules, and regulations. Of course, it is subject to change, especially if additional tax legislation is enacted by Congress before the end of the year.

Finally, remember that these ideas are intended to serve only as a general guideline. Your personal circumstances will likely require careful examination. Consult with your tax adviser.

 

Kristina Drzal Houghton, CPA, MST is a partner at the Holyoke-based accounting firm Meyers Brothers Kalicka, P.C.; (413) 536-8510.

A Turbulent Year Brings Many Changes and Issues to Consider

By Contributor
Accounting and Tax Planning Coronavirus Special Coverage

Year-end Tax Planning

By Kristina Drzal Houghton, CPA, MST

 

This year has been unlike any other in recent memory. Front and center, the COVID-19 pandemic has touched virtually every aspect of daily living and business activity in 2020. In addition to other financial consequences, the resulting fallout is likely to have a significant impact on year-end tax planning for both individuals and small businesses.

Kristina Drzal Houghton

Kristina Drzal Houghton

Furthermore, if the election of Joe Biden is confirmed and the Republican party does not hold a majority in the Senate following the runoff elections in Georgia, it is likely to affect the tax situation in 2021 and beyond. This article will first address 2020 planning and then summarize some of the Biden tax proposals at the end.

In response to the pandemic, Congress authorized economic-stimulus payments and favorable business loans as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act also features key changes relating to income and payroll taxes. This new law follows close on the heels of the massive Tax Cuts and Jobs Act (TCJA) of 2017. The TCJA revised whole sections of the tax code and includes notable provisions for both individuals and businesses.

This is the time to paint your overall tax picture for 2020. By developing a year-end plan, you can maximize the tax breaks currently on the books and avoid potential pitfalls.

 

BUSINESS TAX PLANNING

Depreciation-related Deductions

Under current law, a business may benefit from a combination of three depreciation-based tax breaks: the Section 179 deduction, ‘bonus’ depreciation, and regular depreciation.

• Place qualified property in service before the end of the year. Typically, a small business can write off most, if not all, of the cost in 2020.

• The maximum Section 179 allowance for 2020 is $1,040,000 provided asset purchases do not exceed $2,590,000.

• Be aware that the Section 179 deduction cannot exceed the taxable income from all your business activities this year. This could limit your deduction for 2020.

• If you buy a heavy-duty SUV or van for business, you may claim a first-year Section 179 deduction of up to $25,000. The ‘luxury car’ limits do not apply to certain heavy-duty vehicles.

• If your deduction is limited due to either the income threshold or the amount of additions, a first-year bonus depreciation deduction of 100% for property placed in 2020 is also available.

• Massachusetts does not follow the bonus depreciation, but does allow the increased Section 179 expense; however, many states do not follow that increased expense either.

 

Business Interest

• Prior to 2018, business interest was fully deductible. But the TCJA generally limited the deduction for business interest to 30% of adjusted taxable income (ATI). Now the CARES Act raises the deduction to 50% of ATI, but only for 2019 and 2020.

• Determine if you qualify for a special exception. The 50%-of-ATI limit does not apply to a business with average gross receipts of $25 million (indexed for inflation) or less for the three prior years. The threshold for 2020 is $26 million.

 

Bad-debt Deduction

During this turbulent year, many small businesses are struggling to stay afloat, resulting in large numbers of outstanding receivables and collectibles.

• Increase your collection activities now. For instance, you may issue a series of dunning letters to debtors asking for payment. Then, if you are still unable to collect the unpaid amount, you can generally write off the debt as a business bad debt in 2020.

• Generally, business bad debts are claimed in the year they become worthless. To qualify as a business bad debt, a loan or advance must have been created or acquired in connection with your business operation and result in a loss to the business entity if it cannot be repaid.

 

Miscellaneous

• If you pay year-end bonuses to employees in 2020, the bonuses are generally deductible by your company and taxable to the employees in 2020. A calendar-year company operating on the accrual basis may be able to deduct bonuses paid as late as March 15, 2021 on its 2020 return.

• Generally, repairs are currently deductible, while capital improvements must be depreciated over time. Therefore, make minor repairs before 2021 to increase your 2020 deduction.

• Switch to cash accounting. Under a TCJA provision, a C-corporation may use this simplified method if average gross receipts for last year exceeded $26 million (up from $5 million).

• An employer can claim a refundable credit for certain family and medical leaves provided to employees. The credit is currently scheduled to expire after 2020.

• Investigate Paycheck Protection Program (PPP) forgiveness. Under the CARES Act, PPP loans may be fully or partially forgiven without tax being imposed. Despite recent guidance, this remains a complex procedure, so consult with your professional tax advisor about the details.

 

INDIVIDUAL TAX PLANNING

Charitable Donations

Generally, itemizers can deduct amounts donated to qualified charitable organizations, as long as substantiation requirements are met. Be aware that the TCJA increased the annual deduction limit on monetary contributions from 50% of adjusted gross income (AGI) to 60% for 2018 through 2025. Even better, the CARES Act raises the threshold to 100% for 2020.

• In addition, the CARES Act authorizes an above-the-line deduction of up to $300 for monetary contributions made by a non-itemizer in 2020 ($600 for a married couple).

• In most cases, you should try to ‘bunch’ charitable donations in the year they will do you the most tax good. For instance, if you will be itemizing in 2020, boost your gift giving at the end of the year. Conversely, if you expect to claim the standard deduction this year, you may decide to postpone contributions to 2021.

• For donations of appreciated property that you have owned longer than one year, you can generally deduct an amount equal to the property’s fair market value (FMV). Otherwise, the deduction is typically limited to your initial cost. Also, other special rules may apply to gifts of property. Notably, the annual deduction for property donations generally cannot exceed 30% of AGI.

• If you donate to a charity by credit card in December — for example, if you make an online contribution — you can still write off the donation on your 2020 return, even if you do not actually pay the credit-card charge until January.

 

Family Income Splitting

The time-tested technique of family income splitting still works. Currently, the top ordinary income-tax rate is 37%, while the rate for taxpayers in the lowest income tax bracket is only 10%. Thus, the tax rate differential between you and a low-taxed family member, such as a child or grandchild, could be as much as 27% — not even counting the 3.8% net investment-income tax (more on this later).

• Shift income-producing property, such as securities, to family members in low tax brackets through direct gifts or trusts. This will lower the overall family tax bill. But remember that you are giving up control over those assets. In other words, you no longer have any legal claim to the property.

• Also, be aware of potential complications caused by the ‘kiddie tax.’ Generally, unearned income above $2,200 received in 2020 by a child younger than age 19, or a child who is a full-time student younger than age 24, is taxed at the top marginal tax rate of the child’s parents. (Recent legislation reverses a TCJA change on the tax treatment.) The kiddie tax could affect family income-splitting strategies at the end of the year.

 

Higher-education Expenses

The tax law provides tax breaks to parents of children in college, subject to certain limits. This often includes a choice between one of two higher-education credits and a tuition-and-fees deduction.

• Typically, you can claim either the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit (LLC). The maximum AOTC of $2,500 is available for qualified expenses of each student, while the maximum $2,000 LLC is claimed on a per-family basis. Thus, the AOTC is usually preferable. Both credits are phased out based on modified adjusted gross income (MAGI).

• Alternatively, you may claim the tuition-and-fees deduction, which is either $4,000 or $2,000 before it is phased out based on MAGI. The tuition-and-fees deduction, which has expired and been revived several times, is scheduled to end after 2020, but could be reinstated again by Congress.

• When appropriate, pay qualified expenses for next semester by the end of this year. Generally, the costs will be eligible for a credit or deduction in 2020, even if the semester does not begin until 2021.

 

Medical and Dental Expenses

Previously, taxpayers could only deduct unreimbursed medical and dental expenses above 10% of their AGI. When it is possible, accelerate non-emergency qualifying expenses into this year to benefit from the lower threshold. For instance, if you expect to itemize deductions and have already surpassed the 7.5%-of-AGI threshold this year, or you expect to clear it soon, accelerate elective expenses into 2020. Of course, the 7.5%-of-AGI threshold may be extended again, but you should maximize the tax deduction when you can.

 

Estimated Tax Payments

The IRS requires you to pay federal income tax through any combination of quarterly installments and tax withholding. Otherwise, it may impose an ‘estimated tax’ penalty.

However, no estimated tax penalty is assessed if you meet one of these three ‘safe harbor’ exceptions under the tax law:

• Your annual payments equal at least 90% of your current liability;

• Your annual payments equal at least 100% of the prior year’s tax liability (110% if your AGI for the prior year exceeded $150,000); or

• You make installment payments under an ‘annualized income’ method. This option may be available to taxpayers who receive most of their income during the holiday season.

If you have received unemployment benefits in 2020 — for example, if you lost your job due to the COVID-19 pandemic — remember that those benefits are subject to income tax. Factor this into your estimated tax calculations for the year.

 

Capital Gains and Losses

Frequently, investors time sales of assets such as securities at year-end to produce optimal tax results. For starters, capital gains and losses offset each other. If you show an excess loss for the year, it offsets up to $3,000 of ordinary income before being carried over to the next year. If you sell securities at a loss and reacquire substantially identical securities within 30 days of the sale, the tax loss is disallowed.

• Long-term capital gains from sales of securities owned longer than one year are taxed at a maximum rate of 15%, or 20% for certain high-income investors. Conversely, short-term capital gains are taxed at ordinary income rates reaching up to 37% in 2020.

• Review your investment portfolio. Depending on your situation, you may harvest capital losses to offset gains realized earlier in the year or cherry-pick capital gains that will be partially or wholly absorbed by prior losses.

 

Net Investment-income Tax

In addition to capital-gains tax, a special 3.8% tax applies to the lesser of your net investment income (NII), or the amount by which your modified adjusted gross income (MAGI) for the year exceeds $200,000 for single filers or $250,000 for joint filers. (These thresholds are not indexed for inflation.) The definition of NII includes interest, dividends, capital gains, and income from passive activities, but not Social Security benefits, tax-exempt interest, and distributions from qualified retirement plans and IRAs.

• Assess the amount of your NII and your MAGI at the end of the year. When it is possible, reduce your NII tax liability in 2020 or avoid it altogether.

 

Required Minimum Distributions

As a general rule, you must receive required minimum distributions (RMDs) from qualified retirement plans and IRAs after reaching age 72 (70½ for taxpayers affected prior to 2020). The amount of the RMD is based on IRS life-expectancy tables and your account balance at the end of last year

• Take RMDs in 2020 if you need the cash. Otherwise, you can skip them this year, thanks to a suspension of the usual rules by the CARES Act. There is no requirement to demonstrate any hardship relating to the pandemic. Finally, although RMDs are no longer required in 2020, consider a qualified charitable distribution (QCD). If you are age 70½ or older, you can transfer up to $100,000 of IRA funds directly to a charity. Although the contribution is not deductible, the QCD is exempt from tax. This may benefit your overall tax picture.

 

IRA Rollovers

If you receive a distribution from a qualified retirement plan or IRA, it is generally subject to tax unless you roll it over into another qualified plan or IRA within 60 days. In addition, you may owe a 10% tax penalty on taxable distributions received before age 59½. However, some taxpayers may have more leeway to avoid tax liability in 2020 under a special CARES Act provision.

• Take your time redepositing the funds if it qualifies as a COVID-19-related distribution. The CARES Act gives you three years, instead of the usual 60 days, to redeposit up to $100,000 of funds in a plan or IRA without owing any tax.

• To qualify for this tax break, you (or your spouse, if you are married) must have been diagnosed with COVID-19 or experienced adverse financial consequences due to the virus (e.g., being laid off, having work hours reduced, or being quarantined or furloughed). If you do not replace the funds, the resulting tax is spread evenly over three years.

• This may be a good time to consider a conversion of a traditional IRA to a Roth IRA. With a Roth, future payouts are generally exempt from tax, but you must pay current tax on the converted amount. Have a tax professional help you determine if this makes sense for your situation.

 

Estate and Gift Taxes

Since the turn of the century, Congress has gradually increased the federal estate-tax exemption, while eventually establishing a top estate-tax rate of 40%. The TCJA doubled the exemption from $5 million to $10 million for 2018 through 2025, inflation-indexed to $11.58 million in 2020.

Under the ‘portability provision’ for a married couple, the unused portion of the estate-tax exemption of the first spouse to die may be carried over to the estate of the surviving spouse. This tax break is now permanent.

Finally, guidance has been published establishing that, when the exemption is decreased in the future, a recapture or ‘claw-back’ of the extra exemption used will not be required.

Update your estate plan to reflect current law. You may revise wills and trusts to accommodate the rule allowing portability of the estate-tax exemption. Additionally, consider the maximum gifting currently as allowable in your financial position.

 

Miscellaneous

You can contribute up to $19,500 to a 401(k) in 2020 ($26,000 if you are age 50 or older).

 

BIDEN’S NOTABLE TAX PROPOSALS

Business Tax

• The statutory corporate tax rate would be increased from 21% to 28%.

• The benefits of the Section 199A/qualified business-income deduction would be phased out for individuals with taxable income greater than $400,000.

• The real-estate industry will potentially be impacted. The Biden campaign had suggested potential changes to the §1031 like-kind exchange provisions as well as changes to effectively limit losses that may be utilized by real-estate investors.

 

Individual Tax

Many of the revenue-raising aspects of the Biden tax proposal for individuals apply only to those taxpayers with taxable income over $400,000. It has not been specified whether this threshold is to be adjusted for filing status.

• The top ordinary rate would be restored to 39.6% for taxpayers with income over $400,000. This reflects a return to pre-2017 tax reform when the top ordinary rate was dropped to 37%.

• For top income earners, this rate is currently capped at 20% (plus 3.8% to the extent subject to the net investment-income tax). Under the Biden plan, capital gains and qualified dividends will be subject to the top rate of 39.6% for individuals with more than $1 million in income.

• The Section 199A/qualified business-income deduction would begin to phase out for individuals over $400,000 in taxable income.

• Itemized deductions would be capped to 28% of value. Additionally, benefits would begin to phase out for individuals with taxable income over $400,000.

• The child and dependent care credit would be increased to a maximum of $8,000 for low-income and middle-class families. In addition, the credit would be made refundable.

• First-time homebuyers could receive up to $15,000 of refundable and advanceable tax credit.

• There could be temporary expansion of the child tax credit, depending on the progression of the pandemic and economic conditions. This expansion would increase the credit from $2,000 to $3,000 for children 17 or younger with an additional $600 for children under 6. The credit would also be refundable and allowable to be received in monthly installments.

 

Gift and Estate Tax

The gift- and estate-tax exemption amount would be reduced. Many are suggesting that Biden is looking to reduce the gift- and estate-tax exemption to the pre-TCJA levels.

 

Conclusion

This year-end tax-planning letter is based on the prevailing federal tax laws, rules, and regulations. Of course, it is subject to change, especially if additional tax legislation is enacted by Congress before the end of the year.

Finally, remember that this article is intended to serve only as general guideline. Your personal circumstances will likely require careful examination. u

 

Kristina Drzal Houghton, CPA, MST is partner, Executive Committee, and director of Taxation Services at Meyers Brothers Kalicka; (413) 536-8510.

It’s Never Too Early — or Too Late — to Start Year-end Planning

By Contributor
Tax-Incentives
Law

Taxing Decisions

By Hyman G. Darling, Esq.

As this article is being written, the election is pending, and many people are trying to consider the options relative to tax issues for the end of 2020 and going into 2021. Since no one can predict with 100% accuracy what the tax laws will be in the future, even beyond 2021, it is important to consider the options available. Taking action now will allow you (or your heirs) to save funds.

Hyman Darling

Hyman Darling

Before proceeding, a refresher on federal estate and gift taxes may be needed. The federal estate-tax and gift-tax exemption is what is known as a unified credit, which means the amount may be used to make gifts during one’s lifetime or at death, or a combination of both.

The amount currently is set at $11.58 million for 2020. If the law does not change, this amount is due to reduce to $5 million in 2026 (indexed for inflation as of 2010, so this amount will probably be $6 million). This means a person may gift up to $11.58 million during his or her lifetime or at death before any tax is due. If this amount is exceeded, a tax rate of 40% applies to the excess. Since the unified credit may be reduced, larger gifts may be considered prior to year-end before a new law is enacted next year that could be effective as of Jan. 1, 2021.

Many misconceptions apply to gifts, the most popular being the annual exclusion of $15,000 per recipient. Most people believe that, if the $15,000 amount is exceeded, the donor or the recipient must pay a tax. The law states that a person may gift up to $15,000 each year without reporting any gifts. If this amount is exceeded, then a gift-tax return is required to be filed by April 15 of the year following the gift.

But, again, no tax is due until the $11.58 million is exceeded. For example, if a person gifts to their child, there is a requirement to file a return, but the first $15,000 is ‘free,’ and the next $100,000 merely reduces the credit from $11.58 million to $11.48 million, which is still available to gift during the lifetime or at death. Thus, a person does not have to limit a gift to $15,000 as, in most cases, they will not be paying a tax. (Note that this rule is a tax rule, and does not have a relation to Medicaid planning, which treats all gifts as disqualifying for the five-year look-back period.)

If the estate credit is reduced after 2020, it is anticipated that the credit utilized this year will not adversely affect the amount a person will have available under a new law when he or she dies. So, if a person wishes to make significant gifts, they should make them before the end of the year to utilize as much of the credit as they may want.

For income-tax purposes, there are several options to consider. One easy one is the ‘above-the-line’ charitable deduction for up to $300 if given to a qualified charity. This is not for donations of clothing, as it must be a gift of cash, and it qualifies for everyone, even if a person is not itemizing.

Another significant option is that, in 2020, a minimum deduction is not required to be made from an IRA or other qualified plan. However, some people who have little to no other taxable income may still want to take a distribution as their tax bracket may be low enough to eliminate taxes this year.

“If the estate credit is reduced after 2020, it is anticipated that the credit utilized this year will not adversely affect the amount a person will have available under a new law when he or she dies. So, if a person wishes to make significant gifts, they should make them before the end of the year to utilize as much of the credit as they may want.”

In addition to this option, there is also the benefit for those age 70½ and older who may wish to make a donation to charity. Funds may be paid directly to a charity (or multiple charities) from the retirement account, and this donation will not be taxable income. The annual limit is $100,000, but the distribution does satisfy the required minimum distribution (RMD). If the taxpayer is going to make donations in any event, the IRA should be used to fund the donations.

The amount does not get added to taxable income, so the taxable amount will be less, Social Security payments may then not be taxable, and the Medicare premium will not be higher as the RMD does not get factored into the calculation.

If a taxpayer has losses to report, they may be taken and either reduce income up to $3,000 or perhaps offset gains of other assets. If a person has gains, they may wish to take the gain in 2020 with the anticipation that capital-gains rates could increase and/or income-tax rates may increase.

As with all tax and estate-planning considerations, there are many general rules with specific exceptions, so a qualified professional should be consulted prior to making any decisions. But be sure to get started soon, as decisions should be made and implemented prior the end of 2020.

 

Attorney Hyman G. Darling is a shareholder and the head of the probate/estates team at Bacon Wilson, P.C. He is a past president of the National Academy of Elder Law Attorneys and has been a frequent presenter for the Massachusetts Bar Assoc., MCLE, and many Springfield civic and professional groups. He is a member of the Special Needs Alliance and many local planned-giving committees, as well as an adjunct faculty member in the LLM Program at Western New England University School of Law and Bay Path University; (413) 781-0560; [email protected]

Year-end Sales Are a Gift for Car Makers, Dealers, and Consumers

By
Autos

’Tis the Season

Peter and Michelle Wirth, co-owners of Mercedes-Benz of Springfield, stand in a showroom that is expected to see a heavy volume of shoppers looking to take advantage of end-of-year sales.

The names of the programs have become ingrained in consumers’ consciousness — December to Remember, Winter Sales Event, Wish List Sales Event, and many others — and the TV commercials are seemingly endless. But the year-end auto-sales initiatives have several goals, and have become a present for dealers and consumers alike.

The commercials started appearing during the football games and the Jeopardy! Tournament of Champions, among other places, a few weeks ago.

You’ve seen them … the ones where mom or dad, or perhaps their college-age daughter, looks out the window on a snowy Christmas morning to find a new car in the driveway with a big red bow on the roof or the hood.

The commercials, and there are a lot of them now with a host of themes, are part of what has become a very important — and generally very joyous — time for car makers, car dealers, and, yes, consumers: the holiday, end-of-year sales.

These campaigns all have names now — there’s the Toyota-thon, the Lexus December to Remember, the Mercedes-Benz Winter Event, the Lincoln Wish List Sales Event, and many others. And while it was once mostly a luxury-brand initiative, it’s now generally across the board.

“You have all this inventory being built based on how many vehicles the industry analysts believe are going to be purchased that year. Well, if they forecasted ’19 to be up, and it’s flat, right away you have probably more inventory than you need; this is going to be a great holiday for consumers.”

As for those commercials, while farfetched to some, they are, well, spot on in some respects.

Indeed, a growing number of consumers will ask for that red bow, and, yes, they do like to have it on the car as it sits parked in the driveway or garage on the holiday morning, said Ben Sullivan, chief operating officer for Balise Motor Sales.

“It happens more than most people might think,” he told BusinessWest, adding that, while some dealers will make timely and perhaps dramatic deliveries — even on Christmas Eve — most buyers will get the car (and the bow) a few days before and stash them somewhere.

And there should be more cars with ribbons on them in driveways this year, figuratively if not literally, said Robinson and others we spoke with, because this year’s holiday season is shaping up to be a big one for consumers.

That’s because, overall, auto sales in 2019 have been flat, which is still good considering how strong they’ve been for the past few years. But they were projected to be a few percentage points higher than last year.

Roughly 3% to be more precise, Sullivan went on, adding that 3% of 17 million (the approximate number of cars sold in each of the past few years) is a big number.

“You have all this inventory being built based on how many vehicles the industry analysts believe are going to be purchased that year,” he explained. “Well, if they forecasted ’19 to be up, and it’s flat, right away you have probably more inventory than you need; this is going to be a great holiday for consumers.”

But that’s only one of the reasons why this could end up being an extraordinary holiday sales period, said those we talked with, adding that, in addition to the traditional tax breaks for commercial vehicles — especially the first-year bonus depreciation deduction — a number of other factors are quite favorable.

Ben Sullivan says the holidays sales event help clear lots of cars in advance of the new model-year arrivals, while also helping manufacturers meet their goals for a given year.

These include gas prices — a little higher than earlier in the year, but still relatively low — as well as interest rates (low but projected to climb in 2020) and consumer confidence, which is still rather high as recession fears have eased in recent weeks.

But even in what would be considered more typical years, the holiday-season sale has become an effective vehicle for clearing lots of cars before the new models roll in, and also for introducing a brand to people who might otherwise overlook it.

That’s the case with Mercedes, which has been working hard in recent years to convince car buyers that its models (or some of them, anyway) are within their reach.

Peter Wirth, co-owner of Mercedes-Benz of Springfield, said the dealership, which draws from a large geographic area that includes Southern Vermont, Southern New Hampshire, Eastern New York, and Northern Connecticut, has been active in trying to introduce itself to consumers seeking a lower price range. And the year-end event has been one of many drawing cards.

Joe Clark, general manager of Steve Lewis Subaru in Hadley, said that car maker’s holiday sales event has a different name and different twist. The former is Share the Love, which partially explains the latter, which involves contributions to charities, which adds another ‘win’ to what was already a win-win-win scenario.

Subaru donates $250 for each car sold to a charity of the buyer’s choice, said Clark, adding that there are national and local options, and Steve Lewis matches with $50.

“In 2019, it took until July before all the ’18s had been sold off. In the meantime, all the manufacturers are making ’19s, and here we are coming into the end of the year; you want to start as clean as you can with the next model year.”

“Over the past few years, we’ve been able to raise more than $50,000,” he said, adding that, while Subaru doesn’t offer the same kinds of incentives as other makers — he says it doesn’t need to because the cars are priced appropriately — the charitable donations act as an incentive to bring consumers to the showrooms at the end of the year.

For this issue and its focus on transportation, BusinessWest talked with area dealers about these year-end sales and how they’ve become a different type of holiday tradition.

Opportunities Present Themselves

Tracing the history of the holiday sales push, Sullivan, who works for a company with more than a dozen brands in its portfolio, said that, traditionally, November and December were not big months for dealers, emphasizing the past tense.

Weather played a part in this, he said, as well as the fact that people are, by and large, focusing their time, attention, and spending dollars on the holidays and not a new car.

To spark some life into end-of-year sales activity, manufacturers, as a group, began to offer some of their best incentives at that time of the year, with the goal of hitting sales targets set roughly 12 months earlier.

Now, the deals, the incentives, and, yes, those red ribbons have become a tradition, and savvy buyers set their watches by it.

So much so that October has become a somewhat lackluster month for many dealers.

It wasn’t for Mercedes, which stages an annual certified pre-owned sale that month, said Wirth, adding that the Springfield dealership had a great October and was challenged to keep a good inventory of used cars on the lot.

But that’s another story.

This one is about the holiday sales events, which have, overall, done what they were designed to do — clear inventory and help manufacturers and dealers hit their numbers.

Joe Clark says Subaru’s ‘Share the Love’ year-end event provides consumers with still another reason to shop that brand at the end of the year.

And this year, the sales will be needed to do both, said Sullivan, noting, again, that sales have been flat and there are a lot of 2019s still on the lots that manufacturers would prefer to see gone by year’s end or at least early next year.

“In 2019, it took until July before all the ’18s had been sold off,” he went on, adding that some 2019 models, like the Toyota Tacoma, are still being built. “In the meantime, all the manufacturers are making ’19s, and here we are coming into the end of the year; you want to start as clean as you can with the next model year.

“So this year, in particular, will be interesting because it took so long to get the ’18s sold off, and now we have ’19s that we have to sell off,” he continued. “I expect that the manufacturers are going to do even more in this holiday season than they would typically in order to alleviate that stock level.”

Wirth said Mercedes has two major seasonal pushes — its summer sales program, designed to help dealers clear out inventory before the new model year arrives, and the year-end initiative, which helps meet annual sales goals.

The latter, the Winter Sales Event, is among the oldest in the business, Wirth noted, adding that Mercedes throws not only large amounts of marketing dollars at the program, but some attractive incentives as well.

“And we latch onto these programs on a dealership level because it’s not just marketing,” he told BusinessWest. “The deals are actually really good; if you’re in the market for a new car, November and December is a really good time to buy.”

Elaborating, he said that, while the incentives might not change on some of the models — and Mercedes has quite a few of them — for those months, the deals will become better for models where there is significant inventory and an opportunity to make a dent in it.

And unlike the deals presented by many manufacturers, those at Mercedes involve the latest models, in this case 2020s, as opposed to the 2019s on most lots.

Wirth told BusinessWest there isn’t a deep body of work when it comes to this dealership and the year-end sales events; after all, it opened just a few weeks before the holidays in 2017. But already some trends have emerged.

One involves commercial vehicles, and, yes, Mercedes sells a good number of them. Its vans, the mid-sized Metris and full-size Sprinter, can compete with other makes on price, and they have the Mercedes star on the grill, said Wirth, adding that some of the SUVs also qualify for what’s known as the Chapter 179 tax deduction.

“The accountants talk to their clients and say, ‘hey, you need to do something,’” he noted, adding that, while he can’t remember whether November or December was the top month for van sales last year, the other came in just behind.

Another trend involves the last few months of the year becoming some of the busiest of the year, something that has pretty much always been the case for luxury imports. In fact, the week between Christmas and New Year’s might be the busiest of the entire year, although the week before the holiday is also quite busy, said Wirth, adding that the perception that the very best time of year to buy a car is toward the end of December may well have something to do with this.

But he said the dealership strives to make it a good experience regardless of the month or the date.

Overall, the year-end tax breaks on commercial vehicles have long made November and December strong months for those types of transactions, said Sullivan, adding that, over the past several years, the holiday sales events have broadened the scope of activity to pretty much all brands and all types of vehicles. They’ve made October a somewhat lonely month for dealers, but November and December a time of excitement and, well, anticipation as they wait to see what the incentives will be.

“It’s much like a Christmas present for dealers — we have to wait to open it up when they say ‘the event is now on, and here are the consumer incentives you’ll be able to offer,’” he explained, adding that the numbers are generally known by the middle of November.

And while dealers and consumers are on the receiving end of presents, Subaru’s annual holiday event puts another group in that category — regional and national nonprofits.

“It’s not about car sales or how much you can save on a car,” said Clark. “It’s about Subaru doing what’s right and raising a bunch of money for some great charities.”

Like all the other programs, though, it provides consumers with a reason — or some additional reasons — to shop at the end of the year, he went on, adding that, over the years, the Steve Lewis dealership has supported groups and agencies ranging from area schools to the Dakin animal shelter. This year, the beneficiary will be Cooley Dickinson Hospital’s Cooley Cares for Kids program.

While there are some inventory-clearing motivations for the holiday-sales event, generally Subaru doesn’t have excess-inventory issues, he noted, and, in fact, keeping a supply on the lot is the main challenge.

That’s a Wrap

As he talked while walking through the Lexus dealership on Riverdale Street, Sullivan gestured to the ornate red ribbons atop each of the models on the floor.

He said they’re supplied by a local maker, and generally start appearing on car roofs a few weeks before Thanksgiving. He didn’t say whether this year’s order was larger than normal, but he certainly implied that more ribbons — again, figuratively if not literally — will be needed this year.

That’s because, as he said, this is shaping up to be a joyous a holiday for consumers — one right out of one of those commercials.

George O’Brien can be reached at [email protected]

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