VOL. 133 | NO. 171 | Wednesday, August 29, 2018
Accounting for Music
By Michael Waddell
For veteran accountant and accomplished musician Steve Dunavant, balancing his two passions – music and accounting – is easy. For more than 20 years, he has maintained music as a side gig, playing multiple instruments around town, recording albums, and creating a music label and recording studio to help showcase Memphis musicians. During his weekdays, he crunches numbers as CBIZ senior managing director.
“You can’t really separate your businesses. They all integrate together, and they can feed off each other,” said Dunavant, who earns high praise from many of his longtime clients.
“Our company has always had a great experience with Steve. He truly is a brilliant individual, and his knowledge of the new tax law is second to none,” said Campbell Clinic chief financial officer Daniel Shumate. “When we were audited in 2011-12, he was absolutely excellent to work with during that process.”
Steve Dunavant in his Moscow, Tennessee recording studio. Dunavant founded Thompson Dunavant prior to the business' name chnge to CBIZ, but he has always had a passion for music. Dunavant plays bass in a band he's been in for years, and plays as a session player for other bands that record in his studio. (Daily News/Houston Cofield)
Along with business and music partner Brian Hayes, Dunavant also owns the Farmhouse recording studio in Moscow, Tennessee, just east of Memphis in Fayette County. His parents had owned the property, and the studio was converted from an old woodworking barn that was built by his father.
“He built the place to withstand a hurricane – with extremely thick walls – so we brought in some engineers and decided it was a good place for a recording studio,” Dunavant said. “Now every year we invest our profits back into new equipment, and the beauty of that is that the equipment doesn’t deteriorate.”
Their music label and nonprofit, the Roots & American Music Society, celebrates Memphis as the crossroads of music.
“We started this as a charity that will allow us the capacity to help try to find places where Memphis can play in the modern music arena,” said Dunavant, who is passionate about Memphis and nurturing its amazing creative talent.
While radio was a major factor with finding success for new singles in the past, today it’s the streaming world.
“The barriers to entry are totally gone,” Dunavant said. “It’s all about getting your product into the streaming world efficiently. With every single, we’re releasing a video. We get 3,000 hits within a week with video content through Facebook. Our producer rate is $25 per hour; an artist can book the whole studio for $35 an hour.”
The pair also are developing a music app called The Music Trail, which maps 35 historic sites in Memphis, with educational information and music for each site. The beta came out last fall, and Dunavant expects it to expand to other cities worldwide.
“I’ve always kept a hand in music because I’ve been afraid to stop,” he said. “I’ve been able to do music on terms that were interesting to me and be involved in a different way. What I’ve learned through business and accounting has been a really big help.”
Discovering music was a transformative event for Dunavant while attending Christian Brothers High School in the early 1980s. He had been a lackluster student due to reading comprehension and communication issues and as a child. He agreed to try the French horn for a year to appease his father, who had also played French horn in the band at CBHS.
“The brothers were so great,” he recalled. “They took me under their arm and really helped me. There was something transformative about learning music because it started to change my language channel. All of a sudden, things that had been a struggle to read weren’t a struggle anymore.”
Dunavant was promoted to concert band by his second year, when he discovered rock ‘n’ roll artists like Jimi Hendrix and began to play the bass.
He initially did not plan to attend college after high school and thought he would go into the electrical business with his father. But advisers, who recognized that he had a natural talent for numbers and accounting, pushed him to attend Christian Brothers University to further his education.
He started his accounting career with Bell & Bean while still in college and then worked for Arthur Anderson after turning down an opportunity to tour as the bassist for a country music band. He left Arthur Anderson in 1992 to co-found Dunavant Dickey Masler Shaw. The tax-only firm grew quickly and in 1997 merged with Gordon Thompson’s firm, which handled 50 percent tax and 50 percent audits.
“We felt like we had complementary skills,” Dunavant said. “We were fortunate to be in the right place at the right time. Nobody could’ve projected what would happen with Arthur Anderson and Enron, the turmoil that created, and the opportunity it created for large middle market accounting firms, which we happened to be right in the middle of when it went down.”
Arthur Anderson jettisoned its small and middle market accounts during that time, paving the way for other firms to grow, which Thompson Dunavant did through the 2000s until the recession hit in 2009. The firm recovered quickly in 2010 and became one of the Top 25 performing firms in the country.
“We made some very good strategic investments during the downturn,” Dunavant said. “We caught it in a pretty good upswing and that got us on some national radar. We knew our client mix had changed pretty significantly, and we needed to either grow by acquisition or we needed to be acquired ourselves, because about half of our tax clients were widely held companies and they needed more national coverage.”
The firm was then acquired by CBIZ in 2011, and since then Dunavant continues to help clients with tax planning.
The accounting world brought him a new challenge and chances for creativity last December with the federal Tax Cuts and Jobs Act (TCJA). He began studying the new provisions, learning how they would impact clients in various industries, and creating innovative financial models to help bring some clarity to the new landscape.
“This is the most significant tax law change since Reagan’s cuts back in 1986,” Dunavant said. “Most of us would say the new changes rival or even surpass those.”
He describes the TCJA as like the Wild West, with people creating their own rules, going rogue, and developing completely varied interpretations of the new rules.
“The new tax law reshapes the landscape, and there will be different people making different interpretations because it’s not as clear as it needs to be in certain areas,” he said.
The tax law changes were announced in December and went into effect Jan. 1.
“There’s lots of opportunities that are just flowing by that people aren’t capitalizing on,” Dunavant said. “It’s intriguing to me some of the concepts that are built into this and also frustrating because some of the provisions aren’t balanced or fair.”
For instance, certain businesses are treated more favorably than others, such as engineers having lower tax rates than accountants or doctors.
“I feel like my role is to try to equate the two because I can figure out how to reshape the accountant’s or doctor’s business,” he said.
Another example of tax rate disparity is seen with money that is taken out of a business as income versus letting that same money flow through the business.
“My job is to optimize it for the owner, getting the lowest tax rate under the law, and then they can use those dollars saved to invest in their business,” he said. “As a profession, we’re missing a lot of opportunity that’s flowing right past us this year.”
Dunavant has been the tax accountant for Monogram Foods throughout its 14 years in business.
“We rely on him extensively. He helps us analyze our acquisitions and develop our tax strategies, structuring transactions to maximize shareholder valuation,” said Monogram CEO Carl Schledwitz. “In the Mid-South I don’t think he has a peer in terms of his knowledge. What differentiates him is the ability to take complex matters and explain the pluses and minuses in layman’s terms. He’s marvelous at it, as good as I’ve ever seen.”
As someone who is for economic development incentives such as payment-in-lieu-of-taxes (PILOTs) and tax increment financing zones (TIFs), Dunavant is also on the forefront of how TCJA will make them more challenging, the ramifications for developers, and what those challenges mean for Memphis in the short and long term.
“The tax law change will likely have a significant impact for many Memphis developers using TIF financing,” he said. “In the short term, I expect that many of the current TIF projects underway will find relief under the special transition rule. For the longterm, however, financial models will need to be modified to account for the tax law.”
Campbell Clinic is building a 120,000-square-foot facility at its main campus in Germantown, and the organization wanted to know if there were ways to structure things, particularly from an ownership standpoint, to benefit the organization tax-wise.
Dunavant was meeting with the clinic in October and November prior to the new law coming out to start planning, and by February after the tax law was released a plan was in place.
“We basically restructured the organization, created a venture capital fund, moved the real estate entity outside of our S-corporate main structure, and moved some other real estate pieces around,” said Shumate. “The new tax law happens to be – surprise, surprise – very real estate friendly, so we wanted to take advantage of that with some of the parcels that we own.”
The new tax law changed the income tax treatment of state and local governmental subsidies, including TIF proceeds. Prior to the law change, TIF proceeds received by a corporate developer were generally non-taxable and treated as a contribution to capital. Under the new law, TIF proceeds are taxable if they relate to improvements owned by the corporate developer.
The new law contains a special transition rule for developers who had a TIF plan or a master plan approved prior to Dec. 22. The transition rule allows them to follow the old rules.
In addition to revising their financial models, Dunavant thinks developers will need to consider structuring alternatives that may lessen the impact of the change.