|Stock Market Losses
As a result of the pounding that the stock market has taken in the latter part of this year, we are frequently asked about wash sales. Here is the situation in an nutshell.
If you are showing a loss on a stock and wish to sell the stock and realize the loss for tax purposes, you cannot buy the equivalent stock within 30 days before, or 30 days after you sell the stock and deduct the loss.
Please note: You can offset capital losses against capital gains to the extent of the gains. If you have no gains, or have offset all your gains, the maximum loss you can deduct is $3,000.
As a minimum, a good plan should help you:
- Transfer control according to your wishes.
- Carry out the succession of your business in an orderly fashion.
- Minimize the tax liability for you and your heirs.
- Provide economic well-being for you and your family after you step aside.
A succession plan should be part of your overall financial plan, encompassing all of your needs and objectives. The following tax minimization strategies can play a key role in your overall planning process.
Gift ownership interests to family members. Begin now so ownership can be transferred without incurring unnecessary transfer taxes.
Use a buy/sell agreement that fixes the estate value of your business. An effective agreement provides estate tax liquidity and gives your successors the means to acquire your interest.
If you do business as a corporation, consider a tax-free reorganization in which you end up with preferred stock and your heirs receive common stock. Post-transfer appreciation is kept out of your estate and youíre provided with a stable source of retirement income.
Create an employee stock ownership plan (ESOP) and sell your stock to the plan. Special rules allow you to sell your stock to the ESOP and avoid the capital gains tax if you reinvest in qualified securities. Ownership can be transferred to your employees over time and your business can obtain income tax deductions for the plan contributions.
Plan to qualify to take advantage of the estate tax installment payment option. It allows you to pay the portion of your estate tax attributable to inclusion of your closely held business interest over a period of up to 14 years. Artificially low interest rates apply during the tax deferral period. Other special rules apply.
The Price Earnings Ratio (P/E)
This is an extremely useful ratio when comparing the merits of shares of different values in different companies.
Two important numbers are used in the calculation, namely (1) the market price of the share, and (2) the latest earnings per share figure for the company.
The ratio is arrived at by dividing the market price by the earnings per share.
The big question is what does this number mean? and that is what we are going to try to explain.
We will take this one step at a time.
First, letís define earnings per share (also referred to as EPS). This figure is the bottom line net income of a company after deducting everything (operating expenses, interest expense and taxes), divided by the total number of shares outstanding.
The result is the amount of earnings per share.
|Net income (earnings)
Earnings per share
$2,000,000 / 1,600,000
$1.25 per share
The price/earnings ratio is now calculated by dividing the market price by the earnings per share figure.
Using the above example, if the latest market price was $21.25, the price/earnings (P/E ratio) would be 17.
Recap using the above example:
Earnings per share
The explanation is now quite straightforward and we can give you two different ways to look at it.
- You are paying $17.00 to buy $1.00 in earnings.
- If you buy the above shares at $21.25 with earnings per share of $1.25, it will take 17 years for the company to earn for you, the shareholder, the amount you have just paid for each share purchased.
You can see, therefore, that the price/earnings ratio relates the price you pay for a share to the companyís earnings per share.
There is no good, bad, or ideal number. These numbers will change every time a share price changes. A high P/E number could mean that the share is overpriced, or it could mean that the market anticipates future increased earnings and have bought ahead of anticipated improved earnings. A low P/E number could indicate poor earnings, or it could simply mean that the share is in an oversold situation and could be a bargain
As a word of caution, this number should not be used in isolation. You need to consider other fundamentals, such as, but not limited to, the debt to equity ratio, working capital, cash flows from operations, the ability to meet future debt servicing, industry outlook and numerous other factors.
Most online news services will show the P/E number when you get a stock quote, and your online brokerage service will also show it. So go check them out. It can be an interesting study and it does provide a good starting point for further analysis.