'The Super Bowl of Tax'
Call your senators and representatives, and make sure they know what a pass-through is.
Good Morning!
Here are today’s highlights:
Revisiting The E-Myth: Does it still hold up?
The SBA has just introduced a new working-capital program.
The Michigan Supreme Court has cleared the way for minimum-wage hikes.
The departure of Baby Boomers and the rise of Gen Z presents a marketing problem for winemakers.
TAXES
The Senate is expected to kill a bipartisan bill that passed the House and would restore tax breaks for businesses: “The bill would revive expired tax provisions that help businesses making capital investments or conducting research, and it would expand the low-income housing tax credit and the child tax credit for low-income families. The legislation would also cut off the employee-retention tax credit, a pandemic-era program riddled with fraud and ineligible claims that has cost more than triple the original estimates. It attracted support from progressive anti-poverty groups and the U.S. Chamber of Commerce.”
“The bill’s backers warn about the consequences of inaction. Many business owners harmed by the change to deductions for research expenses have been saying they would lay off workers or shut down entirely if Congress doesn’t pass the bill.”
“Starting in 2022, businesses were required to spread their domestic research deductions over five years rather than deducting them immediately. That caused higher tax bills at large companies such as Lockheed Martin, and it created a crisis for smaller companies that lacked the cash to pay the Treasury. A new study by three accounting professors found that the tax change reduced R&D spending by the most research-intensive companies by $12.2 billion in its first year, a 12-percent drop from what it would have been.”
“Almost all Senate Republicans are expected to oppose the measure, saying it leans too heavily toward Democrats’ priorities. A handful of Democrats might join them in opposition because they see the bill as too tilted toward businesses, and the authors of the compromise just couldn’t find a big enough coalition.” READ MORE
Meanwhile, battle lines are already being drawn for next year’s tax battles: “Across the nation’s capital, preparations are quietly starting for what some are calling the ‘Super Bowl of tax.’ On Capitol Hill, Republicans and Democrats are holding strategy and education sessions. Lobbyists are pressing their case to lawmakers and preparing multimillion-dollar publicity campaigns to defend tax breaks for corporations. Think tanks are churning out research assailing or lauding elements of the byzantine tax code. On the line is the future of the Tax Cuts and Jobs Act, which a Republican Congress passed and former President Donald J. Trump signed into law in 2017.”
“To avoid blowing too large of a hole in the federal budget at the time, Republicans scheduled many of the tax cuts to expire after 2025. That deadline has created a rare opportunity to reshape federal tax policy next year, and lawmakers in each party intend to be ready to wield whatever power voters give them in November.”
“Jeff Brabant is the vice president of government relations at the National Federation of Independent Business, a trade group. A priority for him and other business groups is extending a deduction available to the owners of so-called ‘pass-through businesses.’ These businesses, which constitute a vast majority of corporations in the United States, are not directly taxed, but instead pass on their earnings to owners who then pay individual income taxes on them.”
“Because some staff members on Capitol Hill were teenagers when the law passed in 2017, Mr. Brabant said the learning curve has sometimes been steep. ‘Some staff were in high school that you’re advocating in front of now,’ Mr. Brabant said. ‘They don’t know what a pass-through is. We’re just trying to tell them what this provision is.’” READ MORE
SUBSCRIBER REMINDER
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THE 21 HATS SOUNDING BOARD
On our most recent podcast, Shawn Busse and Jennifer Kerhin revisited The E-Myth, a book many, if not most, entrepreneurs have read, with both suggesting that their perceptions of the book have changed over time. Shawn in particular argued that the book was written for a time when highly industrial, process-oriented businesses were far more prevalent and creative employees were far less in demand. That conversation has continued on our brand new Slack channel:
Michael Bice, of Vortex Engineering, suggested that a good process creates the space for an employee to think creatively: “If the system enables the front line worker to make decisions without having to go back to the boss for answers, that frees those workers to act in the moment. To solve the problem using their instincts.”
Ty Hagler, of Trig, agreed with Shawn: “Somewhere in Dan Sullivan’s writings, he poses a strengths-based view of leadership that runs contrary to The E-Myth. Dan argues that you get the best performance from knowledge workers if you match the organization’s growth to each individual’s growth. I think he unwraps this in the book, Who Not How.”
Jimmy Kalb, of Triad Components Group, said he thinks the podcast panel missed the point: “This methodology basically says, ‘hire quality people, explain the responsibilities and expected outcomes, properly train them to do this work (within the framework of the company's values and philosophies), and then create a feedback loop for continuous improvement.’ In no way does the author suggest that the entrepreneur create human robots as was suggested on the latest 21 Hats podcast. The last step, ‘create a feedback loop for continuous improvement,’ allows employees a certain amount of latitude, responsibility, creativity, and/or curiosity in how to do a better job.”
FINANCE
As of today, the SBA has introduced a new working-capital-loan pilot program: “The new program is an extension of the SBA's prime 7(a) loan program. The SBA spells out in a July 15 Federal Register notice that while traditional loans provide a lump-sum amount up front, working capital lines of credit allow businesses to borrow money only as needed and pay interest only on the time the funds are being used — a boon to cash-strapped owners looking for flexible financing.”
“The loan proceeds may also be used to provide a temporary advance against federal or state tax credits or rebates in addition to other common uses. That prospect allows businesses to immediately access federal dollars.”
“Ultimately, the SBA estimates it will approve about 270 working-capital program loans totaling about $337 million in fiscal 2025. It projects that about half of that volume will be from loans that otherwise would have been approved through the agency's 7(a) Export Working Capital Program or other initiatives, but the other half will be new volume.”
“The program can provide a business with up to $5 million in a guaranteed line of credit. Lenders making loans of $150,000 or less through the program will have an 85-percent SBA guaranty; loans greater than $150,000 will have a 75-percent SBA guaranty.” READ MORE
HUMAN RESOURCES
Michigan’s Supreme Court cleared the way for a series of minimum-wage hikes: “The Michigan Supreme Court ruled on Wednesday that legislators had unconstitutionally subverted a voter-sponsored proposal to raise the state’s minimum wage. As a result of the 4-to-3 ruling, labor groups expect Michigan’s hourly minimum wage of $10.33 to increase by at least $2 in February, once the state treasurer calculates inflation adjustments. There will be subsequent cost-of-living increases through 2029. In addition, tipped workers, who currently can be paid as little as $3.84 per hour, will be subject to the same minimum as all other workers by 2029, putting Michigan on a path to be the eighth state to establish a standard wage floor for all workers.”
“The federal minimum hourly wage has been $7.25 since 2009; for tipped workers, it has been $2.13 since 1991. Those levels remain the floor in 15 states. But a push in recent years to raise minimum wages has notched victories in several states. And laws phasing out subminimum wages for tipped workers have been enacted in cities including Chicago and Washington.”
“The Michigan ruling is likely to upset a range of restaurant and bar owners, who had been bracing as the court’s decision loomed. Having wrestled with elevated inflation for years, many expressed concern about the impact that higher labor costs might have on the profitability — or even survival — of their businesses.”
“Justin Winslow, the president and chief executive of the Michigan Restaurant and Lodging Association, recently predicted ‘dramatic fallout’ if the court ruled in the plaintiffs’ favor, estimating that ‘40,000 to 60,000 restaurant jobs would be lost in very short order’ and that ‘one in six full-service restaurants will just shut down.’” READ MORE
MARKETING
Can wine producers attract skeptical Gen Z drinkers? “The next decade will be a pivotal point for the wine industry, as boomers, who index to wine as a beverage of choice, are replaced by younger consumers, who drink less wine and more cocktails, beer, and nonalcoholic beverages. Silicon Valley Bank, which tracks the wine industry, calls it an ‘uneven split.’ We asked Washington wine producers — and a restaurant wine director — what they are doing to attract Generation Z to their brands.”
“They aren’t interested in aspirational luxury drinking and fancy faux French wine words, nor are they buying into the economic class signaling that a bottle of wine on the table might serve. They are more interested in winemakers than vineyards — the story of terroir isn’t as compelling as the story of creation. I think the natural wine movement is a clear example of a demographic wanting to connect with people rather than history and tradition.”
“We’ve observed Gen Zers to be adventurous and open to new experiences, especially when it comes to new wines, providing wineries the opportunity to play even more in production with new varietals, blends and winemaking methods. This also opens new opportunities for wineries to experiment with packaging, marketing and viticultural practices.”
“We mainly connect with our customers through Instagram or at our tasting rooms in Hood River and Cle Elum. People want to see the behind-the-scenes of what goes into a farming family and winemaking. I think having that identity behind a brand really helps show a level of authenticity and drives a lasting connection.”
“We have a mismatch of supply and demand. The wineries that are best able to deliver affordable wine to the market are big mega-conglomerates with a not-so-compelling story. Smaller, independent, (often family-owned) wineries — the ones that do have a great story and strong ethos — often have a harder time finding quality distribution and have to sell their wine for more per bottle, since they’re not benefiting from economy of scale.” READ MORE
PUBLIC RELATIONS
Now this is good PR: “The Oklahoma couple, who spent nearly two days floating lost in the Gulf of Mexico last week, had planned to hit Kenny & Ziggy’s Delicatessen Restaurant & Bakery, in Houston, once they finished a day on the water with a group of other divers. The Makers are the kind of people who plan trips around meals. They even booked a hotel half a mile from the deli. ‘Where we’re from, we just don’t have that kind of food,’ Mr. Maker said. Ziggy Gruber is a third-generation deli man. His grandfather Max opened the Rialto Deli, likely the first Jewish delicatessen on Broadway in Manhattan, in 1927. Mr. Gruber, the breakout star of the 2014 documentary ‘Deli Man,’ opened his restaurant in Houston 25 years ago with Kenny Friedman.”
“The Makers, who live in Edmond, Okla., a suburb north of Oklahoma City, didn’t know about Mr. Gruber’s outsize reputation when they found the place last year. They didn’t even know much about Jewish deli food. ... But they both fell in love with the place. Mr. Maker, a retired firefighter, in particular became smitten with the ‘Fiddler on the Roof of Your Mouth,’ a triple-deck sandwich with corned beef and pastrami on double-baked rye with Russian dressing and coleslaw. ‘The whole vibe of the place was just so freaking cool,’ he said.”
“But this trip, the sandwich would have to wait. Early in the day Wednesday, an unusually strong current overtook the group of divers while they were under the water. In the scramble to get back on board, the pair — both experienced divers — lost sight of the line that would have guided them back to the boat. They floated to the surface, but severe weather was moving in. The people on the boat lost them in the swells and called the Coast Guard.”
“For the next 39 hours, the Makers bobbed in the Gulf of Mexico more than 20 miles offshore. They got stung by jellyfish and pried sucker fish from their legs. They watched search planes fly overhead, each one too far away to see them. Exhausted, they forced themselves to swim to fight off hypothermia. They sang songs and made up goofy games to lift their spirits.”
“He was almost in a diabetic coma. She was fighting an infection. Her mouth and tongue were badly swollen from the salt water. But for two people who had been adrift in the gulf for nearly two days, they were by and large OK. They were cleared to leave the hospital Sunday and drove directly to Ziggy’s.” READ MORE
MEDIA
Prisoner swap? “Russia is releasing Wall Street Journal reporter Evan Gershkovich and former U.S. Marine Paul Whelan as part of a major prisoner swap with the US, according to people familiar with the situation. The men, jailed in Russia on espionage charges they and the U.S. deny, are en route to destinations outside of Russia. The U.S. and its allies will return prisoners to Russia that they hold under the deal, the people said, asking for anonymity to discuss matters that aren’t yet public.” READ MORE
THE 21 HATS PODCAST
Beyond Trust Falls: An Event Planner Plans an Offsite: This week, Shawn Busse, Jay Goltz, and Jennifer Kerhin talk about what it takes to plan and execute an employee retreat—especially in our post-Covid, more-remote environment. Do you go offsite? Do you take everybody? Do you delegate the planning? Do you try to measure the ROI? Jennifer tells us about the interesting responses she got when she encouraged her employees at her retreat to ask her anything. Shawn explains why he let his leadership team do the planning—and didn’t set a budget. Jay, meanwhile, offers a slightly different perspective: “My company retreat,” he tells us, “is I cut back on my advertising. That's my retreat.”
You can subscribe to the 21 Hats Podcast wherever you get podcasts.
Thanks for reading, everyone. — Loren