There’s No Telling What Your Taxes Will Be
With an election looming and tax laws expiring, businesses are now facing considerably more than the usual tax uncertainty.
Good Morning!
Here are today’s highlights:
Gene Marks is trying out AI apps so you don’t have to.
These continue to be extremely difficult times for independent restaurants.
Remind me again why business owners should be responsible for providing health insurance.
Here’s how Silicon Valley wound up backing “the Theranos of marshmallows.”
TAXES
A great deal of tax uncertainty lies ahead: “Navigating the byzantine U.S. tax rules and completing your return may be enough of a headache. But you can count on fresh tax stress coming from Washington not far down the road. On Dec. 31, 2025, critical parts of the 2017 federal tax law are scheduled to expire. After that sunset, they would revert to what they would have been if that sweeping tax legislation, passed in the first year of the Trump administration, had never taken effect.”
“The business pass-through deduction: It allows some self-employed people whose business income ‘passes through’ to their personal return to deduct up to 20 percent of qualified income. After a sunset, their individual income tax rates would be imposed.”
“Marginal tax rates: The highest rate will rise to 39.6 percent from 37 percent. The income levels for seven tax brackets will be lowered, raising tax liabilities for millions of people.”
“Estate and gift taxes: Now, estates and lifetime gifts valued at $13.6 million are exempt. With a sunset, these numbers would drop to $5 million plus an inflation adjustment.” READ MORE
21 HATS PODCAST: DASHBOARD
Our Man on AI’s Bleeding Edge: This week, Gene Marks offers to boldly go where no business owner has gone before. Few of us need to be convinced that artificial intelligence will be transformational, but even fewer of us have the time, energy, and capability to keep checking on which AI apps and platforms are worth using right now. Which is why Gene Marks has given himself precisely that assignment. This week, Gene reports back on what he found when he explored OpenAI’s GPT store for business owners. Did he find lots of useful stuff? Actually, what he saw reminded him of the iPhone app store (circa 2007). Plus: Gene also explains why divorce can be especially nightmarish for business owners and what they can do to ease the pain.
You can subscribe to the 21 Hats Podcast wherever you get podcasts.
SELLING THE BUSINESS
A protege of Warren Buffett is looking to buy businesses: “For years, Tracy Britt Cool and her partners have been on the hunt for the type of companies that might have once excited famed investor Warren Buffett. These are midsize businesses with a competitive edge, or a ‘moat,’ to use one of Buffett’s favorite terms. Cool spent a decade working for Buffett before co-founding a company called Kanbrick about four years ago. It aims to be an alternative to private equity for family- or founder-owned businesses that want to cash out, or grow, but with some new help.”
“The investment firm has already bought a maker of boat covers based in Missouri’s Lake of the Ozarks and a Louisiana servicer of industrial calibration equipment. It now has more cash to pursue such deals.”
“Kanbrick has raised $220 million, which it plans to use to buy one or two companies a year, and then hold them over the long term. The young firm has yet to exit any of its early investments. ‘We want to be really selective,’ Cool said in an interview. ‘We’re going to be partnering with these companies for 10-plus years.’”
“Kanbrick evaluates about 150 to 200 companies a year, focusing on consumer businesses and those in industrial or business services with about $5 million to $50 million in earnings before interest and taxes. It rules out companies in financial services, healthcare, real estate, and many other industries where the firm doesn’t feel it has expertise.” READ MORE
REGULATION
A federal court has found the new Corporate Transparency Act unconstitutional: “In a blow to government efforts to combat money laundering, a federal court has ruled that the Treasury Department cannot require some small businesses to report personal details about their owners. Under a section of a 2020 law that took effect Jan. 1, small businesses must share details about their so-called beneficial owners, individuals who hold financial stakes in a company or have significant power over their business decisions. The law, the Corporate Transparency Act, passed with bipartisan support in Congress and was intended to help the Treasury Department’s financial-crimes division identify money launderers who hide behind shell corporations.”
“But in a ruling issued late Friday, Judge Liles C. Burke of the U.S. District Court in Huntsville, Ala., sided with critics of the law. They argue that asking a company’s owners to present personal data — names, addresses, and copies of their identification documents — was a case of congressional overreach, however well intended.”
“Judge Burke’s ruling prevented the department from enforcing the ownership reporting requirements on the plaintiff in the Alabama case, the National Small Business Association, a nonprofit trade group that represents more than 65,000 member companies.”
“Lawyers who have followed the Alabama case said over the weekend that they expected the government to quickly request that the injunction be paused, either by Judge Burke or the 11th Circuit Court of Appeals in Atlanta, or both. The Justice Department will almost certainly appeal the Alabama case to the circuit court, the lawyers said.” READ MORE
RESTAURANTS
Independent restaurant owners are getting squeezed by rising costs: “The industry’s economic strains can be seen on the appetizer plate at Chef Zorba’s Restaurant in Denver. Owner Karen LuKanic recently swapped Greek giant beans for homemade stuffed grape leaves to save money, and switched to cheaper shoestring potatoes from thick-cut fries. Denver has increased its minimum wage annually since 2020, most recently in January to $18.29 an hour, while Colorado has expanded paid sick leave and other employee benefit requirements. ‘We are just keeping our head above water,’ said LuKanic, who estimated about half her restaurant’s sales now go to payroll and other employee-related costs.”
“Chef Zorba’s charges $15.75 for a bacon cheeseburger, $5 more than in 2018. Even at those prices the 78-seat restaurant can’t turn a profit. LuKanic said she would consider closing if her Small Business Administration loan wasn’t guaranteed by her house.”
“At Johnny Roger’s BBQ & Burgers, owner Dabbs is scouring every cost. He recently yanked the television from his restaurant, eliminating an $80 a month cable bill. He found a cheaper source for dishwashing chemicals. Since that supplier delivers monthly instead of weekly, Dabbs for a while stored the extra inventory in his garage until he shifted to a storage space.”
“He shaved $50 off the $90 monthly storage bill by catering co-marketing events and providing free meals for the storage space’s employees. ‘The profit percentages are so low,’ said Dabbs, who owns Johnny Roger’s with his wife, Sarah. ‘For that $50, I’d have to do $600 in sales.’”
“Ed Doherty, a franchisee for Applebee’s and Panera Bread who also runs a handful of pubs and wine bars, said he had to re-engineer the menus of his independent establishments to reduce costs in the last year. His chain restaurants, in comparison, had healthy profit margins. ‘That’s the advantage of being with Applebee’s and Panera,’ he said. ‘You are able to negotiate prices better than an independent can get.’” READ MORE
Thirty chefs talk about the future of restaurants: “In January, I went looking for 30 tough, flexible, and devoted professionals who are still making delicious food and serving guests at a high standard. I interviewed them separately, edited their responses for clarity and put together a current picture of the profession. Their responses show some marked shifts and some hot takes. They all hate tipping, but it seems unlikely to change. Culinary school? Usually a waste of money. Gen Z cooks are better at speaking up for themselves, but worse at sticking with a kitchen job — even though pay is now up to $25 an hour for a line cook. The customer is not always right — especially on Yelp.”
“Hajime Sato (Sozai, Clawson, Mich.): ‘Are they breathing? That’s all it takes for me to hire someone right now.’”
“Diana Dávila (Mi Tocaya, Chicago): ‘I don’t think health insurance should be something as an operator that we need to do. That is such a larger issue that this country should offer. But what am I going to do, not offer it and not care about my employees? So we offer health insurance.’”
“Geoff Davis (Burdell, Oakland, Calif.): ‘You need to make a certain amount of money per seat. So if you have $40 or $50 entrees and you have a $19 burger, and a third of the people get the burger, you’re losing a huge amount of money.’”
“Eric Huang (Pecking House, New York City): ‘You can’t be a one-restaurant chef anymore. You have to have a brand. You have to keep feeding the beast and keep your employees and keep the trains running. Cooking is the last thing I get to do every day. It’s handing out W-2s and paying bills and figuring out how to store the garbage over the holiday weekend.’” READ MORE
THE ECONOMY
Unemployment is hindering California’s economy: “Nationwide, the rate is 3.7 percent, and in January, the country added 353,000 jobs. California’s job growth has been slower than the nationwide average over the last year, and the unemployment rate remains stubbornly high — 5.1 percent in the latest data, a percentage point higher than a year earlier and outpaced only by Nevada’s 5.4 percent. With layoffs in the tech-centered Bay Area, a slow rebound in Southern California from prolonged strikes in the entertainment industry and varying demand for agricultural workers, California is facing economic headwinds in the new year.”
“The state has historically had higher unemployment than the U.S. average because of a workforce that is younger and fast growing, said Sarah Bohn, a senior fellow at the Public Policy Institute of California.”
“Still, she noted, the labor force shrank in California in the past six months — a troubling trend. ‘When looking at this shrinking, are there less opportunities and people have just stopped looking for work?’ Ms. Bohn asked. ‘What will this mean for consumers and businesses?’” READ MORE
SILICON VALLEY
Jon Sebastiani, scion of the wine family and founder of Krave snacks, created the “Theranos of marshmallows”: “The problem wasn't the marshmallows — they were, by all accounts, delicious. The problem was scale. Smashmallows were designed to look like an artisanal, boutique product, but that wasn't enough for Sebastiani: He wanted to manufacture billions of them, to build a company that would bestride Candyland like a squishy colossus. That meant he had to grow fast and figure out the engineering on the fly — the classic entrepreneurial strategy of Silicon Valley. When it works, you get Tesla; when it doesn't, you get Theranos. This is the story of the Theranos of marshmallows.”
“In 2009, inspired by the offerings at a local butcher shop, Sebastiani founded an upscale beef-jerky business called Krave. Easier to chew and sweeter than convenience-store jerky, Krave got huge during the paleo craze. In 2015, Sebastiani sold the company to Hershey, the chocolate-bar people, for $240 million.”
“It had taken Krave five years to reach $5 million in annual revenue. Smashmallow got to $5 million in its first year. The next year, its revenue doubled. Retailers like Target and Walmart were clamoring for more, and Sebastiani was bringing outside investors on board.”
“Nobody was forcing Sebastiani to turn Smashmallow into a national brand. The company was already generating nearly $15 million a year. It had dozens of employees. It was making a product that people loved and wanted to buy. Rather than trying to blow the company up into another Krave-size winner, Sebastiani could have just … stopped.”
“‘It could have been a boutique regional brand,’ Sebastiani acknowledges. ‘And there's something authentic and noble in not having to be defined by your revenue, or millions of customers, or the retailers you have. But for me, I'm driven by growing things — not to infinity, but to a high ceiling.’” READ MORE
LISTENER FEEDBACK
Michele Delcoure, a marketing strategist, was surprised to hear Jaci Russo explain on a recent podcast why she had turned down a potential client: Jaci’s point was that she doesn’t want to work with clients who think they can be all things to all people. She wants her clients to understand the importance of identifying a target market. Michele doesn’t really disagree with that, but was surprised Jaci walked away from the client. WATCH MICHELE’S VIDEO
THE 21 HATS PODCAST
Managing Your Tasks, Your Credit Cards, and Your Anxiety: This week, Jay Goltz, Jaci Russo, and Sarah Segal talk about whether it’s finally time for Jay to enter the brave new world of task-management software. That’s, in fact, what his two kids in the business are encouraging him to do. As it happens, Jaci and Sarah have tried most of the project-management tools out there, and they kind of love them—but with one caveat: They can be a lot of work. Which is all Jay needed to hear. After that, we talk about the challenges of managing credit cards and points, and Jay explains why, after 40 years, American Express is no longer what’s in his wallet.”
Plus: the owners tackle a question posed by an entrepreneur with a very new startup: “When does the anxiety of a new business subside?” asks the newbie, which prompts some laughter and this answer: The anxiety subsides in the 42nd year, says Jay, who’s been running his business for 42 years.
You can subscribe to the 21 Hats Podcast wherever you get podcasts.
Thanks for reading, everyone. — Loren