FA Magazine May 2023 | Page 15

times , to 8 %, the agency said . The Inflation Reduction Act of 2022 allocated some $ 80 billion to the IRS , and much of that was earmarked for enforcement .
The Treasury inspector general for tax administration office recently said it found indications in a large percentage of Schedule C forms that the “ businesses may not have been engaging in the activity for the primary purpose of making a profit .”
That means it ’ s essential that clients work with a tax pro if they are starting ventures that make income .
“ Many of our clients know to make us their first resource when starting a new venture ,” Hanover says . “ We keep our clients well informed and provide perspective for them , [ but ] prospective clients and referral
sources are filled to the brim with misunderstandings and bad advice . … Whether it ’ s something they Googled , saw posted on social media , their friend told them or that came up on their TikTok feed , they fail to understand the nuance of their own situations . We spend a significant amount of time educating people and myth-busting .”
— Jeff Stimpson

Are Munis The Antidote To Recessionary Fears ?

As lending tightened after the collapse of Silicon Valley Bank and as job growth has slowed , the Fed may finally be seeing the cooling of the economy it set out to orchestrate .

For investors , it ’ s time to re-examine the shifted landscape , say two fixed-income managers at Los Angeles-based Capital Group , and they say one of the best places to look for some stability is municipal bonds .
Karl Zeile , a portfolio director at the firm , and Greg Ortman , an investment director , write in a report called “ Recession Resilience : Muni Bonds Can Help Shield Portfolios ” that while many high-quality bond sectors can do well in a recession relative to equities , municipal bonds have some unique advantages that could make them shine in an otherwise dismal investment environment : For instance , they offer some resistance to recession impacts , and they offer high current yields and strong post-pandemic fundamentals , all of which act as a buffer if economic growth continues to slow and recession fears mount .
Zeile wrote would happen if the U . S . entered a recession . “ I would expect equities to experience a correction due to the pressure on earnings ,” he said . “ The job market may weaken , causing a cash crunch for consumers , and economic growth would further contract .”
While that sounds unpleasant , those are pains that lead to municipal bond gains . The services supported by municipal revenue bonds tend to be essentials , like water and sewer services , garbage collection and tax collection . Consumers may skip a lot of things , but the essentials are the last to go , and that gives these bonds some resistance to recession .
“ When recession knocks at the door with a car payment , credit card and a water bill due , everyone wants the ability to take a shower ,” Ortman said . “ People might not dine out at a restaurant , but they will open their wallets for water , electricity and gas to avoid shutoff .”
In addition , municipal bond yields are still at or near decade highs . At the end of March , the Bloomberg Municipal Bond Index saw its “ yield to worst ” ( the lowest possible yield on a bond apart from default ) hover around
3.25 %, the authors said , and the likelihood of negative returns even in the wake of market shocks is less than it was a year ago . And , as always , the income on the investment in munis is federally tax-free — and sometimes tax-free at the state level as well .
Add to that the fundamental strength of the municipalities issuing these bonds , and this corner of the fixed-income market is unusually flush . The federal government disbursed billions of dollars to tribal , local and state government through the pandemic , and those strong balance sheets buoy the general obligation side of the muni bond market .
Still , not every sector deserves a buy , Zeile and Ortman said . For example , transportation agencies are still reeling from the pandemic and a recession . Similarly , healthcare and hospitals are still struggling with costs and staffing shortages .
— Jennifer Lea Reed