Last week, we spoke briefly of the American Health Care Act, which has been passed by the House. Following are additional details about the AHCA, as passed by the House. The legislation would:
- Do away with both the individual and employer mandate, and their associated taxes,
- Do away with the Medicine Cabinet Tax, which places a tax on medical devices, drug companies, and health insurers,
- Do away with the 40% tax on high-cost employer-sponsored group plans, known as the Cadillac tax,
- Shift Medicaid funding to a fixed amount per year per Medicaid enrollee,
- Give states the option of receiving Medicaid funding in block grants, rather than per capita, for certain populations,
- Waive the Essential Health Benefits requirement, thereby giving states much more latitude, and control over, what each state considers “required” coverage and benefits,
- Waive the “community rating” and “mandatory age rating” rules, giving states and insurers much more flexibility regarding pricing,
- Eliminate income based subsidies, and replace them with age-based tax credits, ranging from $2000 to $4000 per individual,
- Eliminate the tax on FSAs, HSA withdrawals, and the 3.8% surtax on investment income, and the 0.9% tax for certain high income households.
Overall, this restructuring is a major step in the right direction, in terms of returning control of health care financing decisions to the individual, household, and state level where, in our opinion, they rightfully belong. And, it returns dollars to the pockets of taxpayers, again, where those dollars rightfully belong.
For most households, there is a 100% correlation between earned income and cash flow. Cash flow though, can come from several sources, including earned income, business income, pension income, and portfolio income. Business income is a fairly broad category, and can include rents, royalties, and distribution of profits, among other things.
Cash flow can also come from reimbursed expenses, or funded by corporate expense accounts, in specific situations, or from debt or equity financing. Note that financing, whether debt or equity, comes with its own set of costs and other considerations.
The business marketplace has an interesting array of participants. Traditional business or company owners tend to focus on developing several types of tax efficient cash flow. The focus is on cash flow diversification and revenue quality. These provide some level of safety and security. And done well, there should be sufficient cash flow, after taxes and lifestyle expenses, to redeploy into building additional cash flow. Cash flow from operations, and return on equity, or net dollars invested, are two key metrics we like to keep an eye on.
Tax efficiency matters. Tax efficiency though, is not just income taxes. It also includes personal and real property taxes, and can includes sales and use taxes.
Another group of participants in the business marketplace are what we can call shareholders. We typically find these in startup companies, or in disruptive sectors. Over the last 20 to 30 years, the large majority of these shareholders have been in the technology arena.
The goal with shareholders is not to maximize sources and efficiency of cash flow. The goal of shareholders is to ramp revenue into eight or nine figures within a short time frame, such as three to seven years. The purpose of the quick ramp up in revenue is to achieve a liquidity event, as an exit strategy for shareholders, and especially founding shareholders.
This sale could be to a larger company, or through the public markets with an IPO. Whether one or the other is one of several considerations in preparing for the liquidity event.
Shareholders who experience a liquidity event can be surprised by the tax implications of the event. And many times, founding shareholders will take some of the proceeds and repeat the process, building another company. Like all of us though, at some point they will be looking for cash flow.
Quote of the week:
“From birth to age 18, a girl needs good parents. From 18 to 35 a girl needs good looks. From 35 to 55 a girl needs a good personality. From 55 on, a girl needs good cash.”