The Wisdom of Using Your Gut Instinct

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The Wisdom of Using Your Gut Instinct

Mar 21, 2020

by Gregory S. Dowell

February 29, 2020

A local business had taken an ownership position in a distillery in the Midwest. The distillery was the brainchild of one man, and he came to the concept of micro-distillery at exactly the right time. The industry was not set to explode for a couple of years yet, so he was an entrepreneur who was in the right place and the right time, just as the demand curve was accelerating. The distillery business was exciting, and was piggy-backing on the buzz of the microbrewery boom that had taken place. By virtue of knowing my client, the entrepreneur was also fortunate to have the right investor – someone with deep pockets and industry connections that could help the distillery get to market quickly. The plan, as articulated to the investor, was to expand, expand, and expand, selling as many barrels as possible to gain a foothold, then to sell out to one of the big distilling houses.

Everything was rosy during the “dating” stage; the investor was enamored with the entrepreneur and vice versa. However, it wasn’t long before the flow of information from the investor slowed to a trickle. Sure, he was always there with plenty of verbiage and marketing hype, but he didn’t like to put hard, cold financial information in front of the investor. At the same time, there were always capital calls that needed to be made within a tight timeframe – maybe it was a great opportunity to buy supplies or product, or maybe it was a too-good-to-pass-up chance to expand with more equipment, but the demands for cash were always immediate and significant. When the investor had enough of the financial demands and the dancing around, he contacted our firm. He was several million into the deal. The task sounded deceptively simple: Figure out if the distillery was making money. If it wasn’t, what was the reason, and what realistically was the rate of cash burn for the foreseeable future?

The entire experience can be summed up from the initial meetings that were held. From the moment of our first interview with the entrepreneur, we were uncomfortable. He was less than forthcoming when we asked pointed questions about the financials. He said he couldn’t let us look at the accounting records immediately because they had fallen behind with the recordkeeping. Later, he indicated that they lacked the ability to accurately track their expenses and cost of goods sold. Our team of CPAs went on-site to one of their locations (they had two), with the express intent of seeing what data might or might not exist – we were kicking the tires and looking under hood. The visit was planned well in advance, and the business had plenty of time to prepare. From one perspective, the day on-site was wasted, as there was a lot of standing around while the entrepreneur and his internal accounting team attempted to pull the records together. From another perspective, that day told us volumes about the business, re-affirming our initial gut reaction to the business and the entrepreneur. When we finally received information, it was a nearly useful blend of excel spreadsheets and handwritten notes.

This engagement lasted several weeks, with many more delays caused by the entrepreneur and many more reams of bad data. All the while, however, the entrepreneur continued to pressure the investor for another capital infusion. The paradox, of course, was that the entrepreneur could not show that he had been a good steward of what had been entrusted with him, and yet he wanted more. While we were saddled with bad data and an entrepreneur who was interested in obfuscating the truth, our team of CPAs persevered. Using forensic accounting techniques, we pulled together the most reliable financial data possible, so that we could ultimately give our client a sense of the real financial condition of the business, as well as where it was headed. After sharing the results and our insights, it was clear that our investor needed to find an exit strategy, or at least limit any further financial damage. From our perspective, we look back on this engagement as a reminder of the power of doing the fundamental things right in a business. All of the talk and hype may sound clever and mesmerizing, but eventually what counts is financial performance. Transparency is important; when business partners cease being transparent, let the buyer beware.

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by Gregory S. Dowell Updated May 16, 2023 Spring is the traditional kick-off to wedding season, and thoughts quickly turn to the wedding venue, gifts, the happy couple, and, of course, the guest list. Lurking somewhere in the shadows, behind even that strange uncle you barely know, is another guest that needs to be considered: The tax impact on the newlyweds. To start, newlyweds will have two options for filing their income taxes in the year of marriage: Filing status can either be married filing jointly, or married filing separately. In the vast majority of cases, a couple will benefit with a lower overall tax burden to the couple by choosing to file married filing jointly. One of the classic cases where a couple may consider filing separately is when one spouse has significant amounts of medical expenses for the year. Medical expenses are only deductible if they exceed 7.5% of adjusted gross income; using only one spouse's income may allow a deduction to be taken if filing separately, compared to losing the medical deduction entirely if both incomes are combined by filing jointly. We previously had written about the tax trap that often occurs when two people get married, resulting often in an unanticipated balance due when the first joint tax return for the couple was filed. While President Trump’s Tax Cuts and Jobs Act (TCJA), changed the dynamics somewhat, it is still worthwhile to put pen to paper before saying “I do”. Prospective spouses have the opportunity to save money by taking income tax considerations into account before tying the knot. That’s particularly true for those who plan to marry late this year or early next year. As this article explains, from the federal income tax standpoint, some individuals marrying next year may come out ahead by either deferring or accelerating income, depending on their circumstances. Others may find it to their advantage to defer a year-end marriage until next year. For some quick background, a “marriage penalty” exists whenever the tax on a couple’s joint return is more than the combined taxes each spouse would pay if they weren’t married and each filed a single or head of household income tax return. Before President Trump’s TCJA, only the 10% and 15% married filing jointly brackets were set at twice that of the singles bracket, and so the marriage penalty effect on joint filers applied in the brackets above the 15% bracket. Beginning with the 2018 tax year, however, the TCJA set the statutory tax brackets for marrieds filing jointly-through the 32% bracket-at twice the amount of the corresponding tax brackets for singles. As a result, the TCJA eliminated any tax-bracket-generated marriage penalty effect for joint filers where each spouse has roughly the same amount of taxable income-through the 32% bracket. For example, if two individuals who each have $215,950 of taxable income file as single taxpayers for 2022, each would have a tax bill of $49,335.50, for a combined total of $98,671. If they were married, their tax bill as marrieds filing jointly would be $98,671, exactly the same amount as the combined total tax they’d pay as single taxpayers. Because the 35% bracket for marrieds filing jointly isn’t twice the amount of the singles 35% bracket, the marriage penalty effect will still apply to joint filers whose income falls in the 35% bracket. Using 2022 tax tables, two single taxpayers may each have $500,000 in taxable income, for a combined total of $1,000,000, without having any of it taxed higher than 35%. However, for marrieds filing jointly, the 35% tax bracket ends at $647,850 in taxable income, and each additional dollar of taxable income taxed at 37%. Thus, where two high-earning unmarried taxpayers with substantially equal amounts of taxable income are planning for their marriage to take place either late this year or early next, it may pay from the tax viewpoint to defer the marriage until next year. As an example, if two individuals each have $539,900 of taxable income file as single taxpayers for 2023, each would have a tax bill of $162,718, for a combined total of $325,436. If they were married before the end of the year, their tax bill as marrieds filing jointly would be $334,076, or $8,640 more than the combined total tax they’d pay as single taxpayers. If only one of the prospective spouses has substantial income, marriage and the filing of a joint return may save taxes, thus resulting in a marriage bonus. The bonus is the result of two factors: 1) the tax brackets for marrieds filing jointly cover wider spans of income than the tax brackets for taxpayers as singles; and 2) the taxable income of the lower-earning individual may not push the couple’s combined income into a higher tax bracket. In such a case, it will probably be better from the tax standpoint to accelerate the marriage into this year if feasible. There are a number of other factors that should also be taken into account when determining the effect of a marriage on income taxes of the couple. As mentioned early in this post, the first decision is to verify that filing a joint return is preferred to filing separate returns. In addition, many provisions of the tax code phase out completely (or decrease partially) as adjusted gross income increases. In a perfect world, there would only be good surprises for a newlywed couple following their wedding. To avoid any unpleasant income tax surprises, we always recommend that a newlywed couple take the time to make a projection of what their income will look like when combined as a couple, and determine what the tax bill will look like, at the Federal and State levels. After all, planning ahead, communicating with each other, discussing finances, and avoiding unpleasant surprises are some of the keys to a long marriage.