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Episode 050: Leading Your Business Through Tax Changes in 2022

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We can all agree that there’s no shortage of uncertainty when it comes to what 2022 may look like for businesses, and taxes are no exception. With IRS delays, potential legislative updates and a dynamic business environment, how should organizations respond?

In this episode of The Wrap, tax experts and business advisors Lisa Billings, CPA, and William Dow, CPA, join our hosts to discuss tax changes, IRS updates and what businesses should know to position themselves well for 2022.

After listening to this episode, you’ll:

  • Understand where legislative updates stand that may impact your company’s tax position
  • Know what to expect in the short term for tax changes
  • Understand how tax changes may influence your company’s M&A plans
  • Be aware of what factors your business should consider when planning for the future in today’s environment

This episode reflects our views at the time it was recorded.

Resources for additional learning:

 

 

Commentators: (00:00:00) Hey, I’m Paul Perry and I’m Kim Hartsock and you’re listening to The Wrap, a Warren Averett podcast for business leaders designed to help you access vital business information and trends when you need it. You can listen, learn, and then get on with your day. Now let’s get down to business.

Kim Hartsock: (00:00:17) We’re back with season seven and as always, you can find us on all streaming platforms where you listen to your podcasts and this year, we’re so excited to announce a new partnership with Business Radio X. So welcome to all our new listeners.

Paul Perry: (00:00:34) To start off the first episode of this new season, we wanted to get back to some of the conversation that we’ve had with two of our colleagues, Lisa Billings and William Dow from our Tax Department here at Warren Averett.

There’s a lot of uncertainty that’s going on in the markets, and there’s a lot of uncertainty that businesses are having to respond to. I think this is a great way to kick off the season to get back into this and see what has happened. See what we are expecting and see kind of what those factors are that are shaping decisions that businesses have to make.

Kim Hartsock: (00:01:04) Yeah, so Paul, we just decided, what better way to get the season kicked off, than the exciting topic of potential tax changes? You’re going to walk away with some really interesting facts and also some action items on what you can be doing now to prepare for things that we think are to come.

And today, we have joining us again, William Dow and Lisa Billings, both Members in our Tax Department and experts on this subject. We’re really excited to have you both here. Welcome back, William and Lisa.

William Dow: (00:01:34) Thank you. We’re glad to be back from another year of exciting tax work.

Lisa Billings: (00:01:38) Yes. Glad to be back on The Wrap.

Kim Hartsock: (00:01:39) Yeah. Maybe it’s a good place to start -I read the taxpayer advocate report and it reported that the IRS is so short-staffed that they only had one person working for every 16,000 calls.

William Dow: (00:01:51) Yes. Kim, that is a good place to start because it’s always been an ongoing issue because you know, the IRS is charged with whenever there’s a new tax law, they’re in charge of enforcing the new law coming out with the new regulations, you know, and then enforcing it.

Generally, they don’t have the manpower to even handle what they have. If you take that, you take COVID, but those two—just those two—put them behind so much. We had different filing dates over the last two years that there’s just such a backlog.

It’s to the point now where we’re reluctant to call at times because you can be on hold for four or five hours before you can finally get through to somebody. There’s another situation that what we’re hearing is that a lot of tax returns are just sitting stacked up on floors at the IRS because they’re so behind on processing them.

They’re now kicking out notices and we’re seeing taxpayers receiving IRS notices left and right for assessment saying, “You know, either you didn’t file your return, or we have not processed your payment, you owe this money.” Such that Congress has now come out and is asking the IRS to put up, I think, a six-month moratorium on sending out these auto-generated notices, because they’re causing so many problems out there.

The IRS came back with a response, kind of fighting back a little bit, but it will be interesting to see how that all plays out.

Paul Perry: (00:03:21) With all of those issues, there was a lot of conversation about the bills that were coming due in the Senate and the House, trying to look at new tax policy. There were some things that were in the policy. There were some things that as people were planning for the year-end and looking to the coming year, there was a lot of uncertainty that they had to respond to.

There’s a lot of things that were in that bill that people were looking at. And I just want to have a conversation now, Lisa and William, on what were people expecting with the bill and what actually came through on the new bills that have been around these last couple months?

Lisa Billings: (00:03:57). Well, there was a lot of expectation that there would be an increase in tax rates.

I think that was the overall across-the-board from the time, you know, while we were in the presidential election all the way through 2021. There was just a huge assumption that we would end up with higher tax rates across the board. And what was interesting was as Congress was really starting to divide these bills, you know, they had the infrastructure bill that passed. They started with the American Rescue Plan that turned into the Build Back Better Plan. You know, as these bills developed, they realized that there were two senators who really put a stop on some of these increases.

And, at the end of the day, nothing got passed, which is very interesting. But you can kind of look and see that, “Okay, there were some things that everybody agreed on.” No across-the-board tax increases was one of the things that ended up in the bill, but there were some very targeted increases as far as for high-income individuals.

You know, if you had adjusted gross income over $25 million, it was an 8% surcharge on your taxes. Corporations, you know, they revived the corporate AMT. Of course, it didn’t get passed, but it was agreed upon.

That’s something that was actually removed a couple of years ago in the big tax reform bill that potentially could be coming back into play. And part of that also goes into the global tax policy because President Biden has agreed to some global tax provisions with other leaders and some of these provisions were in the bill really need to happen to meet the requirements of this agreement that they have made.

William Dow: (00:05:55) Lisa, that’s a great point. What our listeners should come away with was that it was a year of a lot of uncertainty and a lot of confusion. But as you pointed out, there were some provisions that they seem to agree on.

2021 is probably the year of the most confusing uncertainty that we’ve seen because most people early in the year fully expected to see tax increases.

In fact, in the spring of last year, when President Biden came out with his green book, which is his wishlist of items that he wants to see in tax changes, one that was in there was to increase the capital gains tax rate. What had everyone really scared was, that based on the wording, it had an effective date of when the green book was published back in the spring.

All of a sudden, you had people realize, “And I may have missed the window.” But then, that started being moved around. We saw more activity last year in the M&A world. People doing transactions, trying to get them done before there could be a potential capital gains incurrence.

Kim Hartsock: (00:07:04) That’s really good to hear you guys break down because there was a lot of confusion, right?

It started with one bill. Then it broke down into two bills and then one got through and the other one is kind of stalled. You spoke to some of the things that that did change, but there’s a lot of things that are agreed on that we could be preparing ourselves for to be in an upcoming bill.

What are those things? What are the things that they agreed on that we should expect to come through at some form, you know, in the near short term?

William Dow: (00:07:38) The key things would be a corporate AMT, a kind of a minimum tax on corporations. They will probably be some type of individual tax rate increase, not as high as they were looking at.

They’re probably going a bit more through these kind of surtaxes for the higher earning taxpayers, where there could be an additional tax of 5% if you’re over $10 million and 3% if you have over $25 million. So as Lisa said earlier, you can have an extra 8% if you’re over $25 million. You know, that wouldn’t an impact a lot of people, but it does have a pretty widespread impact across the nation.

And if we see an increase of the capital gains rate and that’s the one that keeps kind of getting stalled. Another thing to point out is that with all these bills that they tried to pass that didn’t, it shows what you call the power won. The people that are really behind the Build Back Better Plan say that the CBO has really missed the mark.

They’ve missed the calculations simply because they don’t think that they have factored in the revenue that’s going to be raised by the IRS from increased enforcement actions. Think about that for a minute.

And it goes back to what I mentioned earlier about, you know, going after these abusive tax shelters and going after high-income taxpayers. And we’re seeing that they’ve increased the audits for individual taxpayers. It will be interesting to see because I really think that it’s the right set up for the perfect storm and what’s going to happen between any tax legislation and how the IRS has been trying to implement it.

Paul Perry: (00:09:09) Lisa, I want to go back to something that William talked about a moment ago, which was the M&A deals. We saw an increase. We saw a ramp up at the end of 2021, related to that for the people who didn’t get that piece and they’re still considering, “Hey, maybe I need to do this, or maybe this is something I need to think about.”

You know, it’s one of those things and we’ve had several podcasts with some of our other colleagues around M&A deals and what you need to do to prepare for those and prepare early and not late.

But from a tax perspective, what is expected, what is coming, what would you say to those business owners from an M&A perspective if they’re still thinking about that and they didn’t get it in before the end of 2021?

Lisa Billings: (00:09:52) Obviously, you don’t want the tax tail to wag the dog, but you do. You do want to go ahead and look at it because you could potentially structure a deal to keep your AGI down below these thresholds. You know, I’ve talked to several business owners who were looking at exits and could possibly structure multi-year deals.

Each year, their income would be below these surcharge thresholds. Then that could help them plan and get the most benefit out of the transaction. So there are things to consider, but I think that if you’re thinking about going down the M&A route, go ahead and see what’s out there and then see if there is a way to structure the deal.

The good news is, as of right now, it looks like there won’t be an across-the-board raise in capital gain rates. Then, it’s just structuring around things like the surcharges or possibly some increased Obamacare.

Paul Perry: (00:10:58) Okay. If there’s no expected increase in those capital gains, then maybe if you still want to do the deal, do it but don’t rush into it, right? Take your time now is what you’re saying.

You definitely don’t want to rush into things before year end. Some of them happened, some of them didn’t and maybe that’s not something they need to think going forward.

Lisa Billings: (00:11:23) Absolutely. I think the good news is for the time being the fear of an increased capital gains rate is off the table. I say take your time, make sure the deal’s right, and get the good economic deal rather than to try to fit it in to get the best tax benefits.

Commentators: (00:11:47) If you want to receive a monthly newsletter, then head on over to warrenaverett.com/thewrap and subscribe to our email list to have it delivered right to your inbox. Now, back to the show.

Kim Hartsock: (00:11:55) William, we started with the state of the IRS and we talked about some of the challenges that they’re facing, but there’s also some changes that the IRS is rolling out right now. What are some things that we need to be on the lookout for?

William Dow: (00:12:13) Well, some tax items that are new for this year that the taxpayers need to look at is research experiment expenses. Previously, taxpayers could deduct that. Now they must capitalize them and amortize them over 60 months and if it relates to foreign expenditures, that’s over a 15-year period.

That’s a big change that applies to taxpayers, and that’s also an area there’s been a lot of lobbying going on trying to get things changed. The Carried Interest legislation has been enacted where they’re going after these carried interests that a lot of private equity funds have and they have a three-year holding period that’s required there for the managers.

And a small one that doesn’t get a lot of attention is for these exempt taxes organizations with compensation over a million dollars; now there’s basically a penalty surcharge imposed on them. Those are just some of the items that are out there that are new. One that’s expired and that basically benefited a lot of taxpayers was the deduction that non-itemizers could take for charitable contributions.

In other words, you know, a single could take a $300 deduction or do charitable contributions without having to itemize, but that’s now expired. So, it may have to be seen whether that comes back or not.

One item that’s just come out recently that could really impact pretty much all taxpayers is the IRS is going to implement a required facial recognition policy. That doesn’t mean you’d have to have it to file a return. That is, if you want to basically get on the IRS website to access your account and look at certain items, you have to go through this program and you have to have a picture of your driver’s license.

You’re able to take your picture and post on there along with some other information. You basically have facial recognition to prove that you are who you are.

Kim Hartsock: (00:14:06) All right. What are some things, Lisa and William, as we look to this year, what do we need to be on the lookout for? What do we need to be doing to prepare?

Lisa Billings: (00:14:18) One thing that that’s on the horizon and that is more of a state issue, but it is something that we’re seeing across the country. A couple of years ago, tax reform put a limit on the deductibility of state taxes for individuals.

A lot of states right now—I know Alabama has one effective for 2021 and Georgia has one effective for 2022—a lot of states have created what they call a business entity tax for pass through entities that allows pass-through entities to basically pay state taxes and deductible on the return.

That is a new concept that could be very beneficial for some businesses and it’s something that people need to be looking into because about 18 or 19 states have passed this type  of tax option that can really be beneficial. But each state’s laws are a little different and something that you have to really consider is if it makes sense for you.

Paul Perry: (00:15:26) We’ve, we’ve talked a lot about the federal and state tax laws, requirements or potential issues, but let’s go a little bit higher and let’s talk a little bit more global, you know, what are some of the other economic decisions that are out there?

What are some of the other factors related to economics that businesses need to be considering when thinking about how do I plan for the future and how do you know? There’s a ton of them and it doesn’t matter if we’re talking about taxes, if we’re talking about the labor market or anything else related to how a business is run. The economy and those factors are going to play a part. William, what is a short list of those items that you think the listeners need to be aware of?

William Dow: (00:16:12) That’s a good point because, you know, we tend to look at very specific things here in the U.S.

But really where we’re now looking at it, it’s more of a macro approach and what’s going on big picture things that can trickle down and affect taxes. I will give you a list of things that we think people should look at. You know, one is inflation, and right now we have the highest inflation rate we’ve had in 40 years.

I think it’s a blip, but inflation, it’s going to drive prices. It’s going to drive cost of salaries so that can have a strong impact. As we all know, the prolonged COVID issues that are out there have caused a lot of problems. And as we’ve seen, there’ve been a lot of tax issues that have come out of that – a lot of tax credits, PPP program, items such as that.

So COVID has been a very big one. The fractured geopolitical climate that’s out there, us and Russia and what’s going on with Ukraine. The big one is us and China, you know, so many issues there. We talked about doing sanctions against China. Where do we get a lot of our goods from right now? China. Who was one of the largest holders of U.S. debt? China.

They could get back at us on that with issues that can impact tariffs that can impact taxes and foreign countries. So those policies, you have to look at one thing in the background that a lot of people aren’t aware of, is digitalization of everything worldwide: how does that get taxed?

And so the Organization for Economic Cooperation and Development had a digital tax project that around 130 countries signed that’s going into effect in 2023. And so that’s where basically, they’re going to try and have a uniform tax policy across the world for digital business.

Well, that raises questions. You know, how do you measure that? You have to have good recordkeeping, you have to know what you did in different countries. You have to look at that and supply chain issues.

Another big one we’re saying is the corporate governance and the focus on environmental, social and governance issues. Paul, I know you’ve spoken and had a lot of presentations on that. That’s not something we’ve really thought about or worried about is that this is more of a big picture kind of global thing, but that’s really coming to the forefront that we’re seeing.

That’s going to raise questions in the tax area: how do you manage? Especially, the carbon footprint and things like that. So that gets into recordkeeping that can say: how do you measure it? How does that affect your operations in different locales can then impact your tax rates and tax impacts in those states, in countries and territories.

So that’s really rising to the forefront on a lot of these, because we’re going to say that that’s going to be a big measurement thing and they will probably start tax laws enacted around how effective companies are in that.

Paul Perry: (00:19:24) And ESG is one of those topics that people want to talk about.

Some people want to talk about it, some people don’t, and they’re very staunch on which side they want to do that. But from an ESG perspective… Now, I’ve got another podcast for you, William, you’re going to be my guest for an ESG podcast. There are a lot of companies saying, “Look, whether I believe in ESG or not, or if I believe what it’s requiring, I have to be responsive to the market and I have to be responsive to my customers and my employees and my vendors and my industry, or I’m not going to be playing in that space.”

And so it’s one of those where it’s definitely a new topic. But I would argue that 25 years ago, if there was a religious organization that had an investment policy that said we are not going to invest any of our dollars in these types of businesses. That was the beginning of the ESG piece in the conversation, and now it’s grown into more of how do you run your business on a daily basis?

ESG is becoming more global, right? So even the IRS foundation is establishing the international sustainability standards board and they’re going to try to create a global standard for ESG that people will need to follow.

Obviously, there’s no requirements, no regulations for businesses to do so, other than just being responsive to the market, like I said, so definitely a hot topic that could drive things from a global perspective. Y’all talked about global tax a couple of times today, and that’s definitely something that will factor into it.

William Dow: (00:20:56) Like Lisa said earlier, you’d never let the tax tail wag the dog. But what I’m concerned about is that we may start seeing the ESG tail wagging the dog, because that is such a hot button.

I’ve read where several large public CEOs who’ve come out and said that that is what their focus is for the coming year.

Paul Perry: (00:21:17) You’re starting to see chief governance officers and chief sustainability officers within organizations. I’ve seen one organization come out and say, we have somebody that is focused on ESG and the tax perspective of it.

So just every angle of ESG could be analyzed or could have an effect on businesses, but definitely the tax piece would be in interesting.

Kim Hartsock: (00:21:41) Well, William and Lisa, we always try to wrap it up here in 60 seconds or less. In terms of the conversation of 2022 and where we are in the uncertainty of taxes and managing your business, how would you wrap it up for our listeners?

William Dow: (00:21:57) I think that we’re going to definitely see some changes this year. So be on the outlook for that. I know that President Biden really wants to get some bill passed by his State of the Union address, is what he’s hoping. You know, this was the year of midterm elections and looking back, I read the other day this: Since 1978, there’s only been one time that when you had an incumbent president’s party that did not lose seats in the midterm and that was with Bush after 9/11.

It’s just interesting to say that based on that and based on just history, what this tells us is that the Democratic party will probably lose a lot of seats and you could see a change in the balance of power, and if we see that and more Republicans coming into more power, you’ll see a total shift in tax policy. And a lot of these things that Lisa and I have been talking about could fall off the board and they could be very, very quiet and unproductive.

Lisa Billings: (00:22:59) Yeah, I think that really is going to be interesting to see how much they can get done before the midterms.

I do expect something, it may be in small pieces compared to what they tried to push through last year. But at the same time, there will be some changes as the year goes on. And it’s just going to be something that we watch to see how much they can agree.

William Dow: (00:23:24) That’s a great point, Lisa. And like I said earlier, they’re basically coming to Senator Manchin and saying, tell us what you want and we’ll do it because we want to pass the bill. So you had a great point. We will probably see something. It’ll just be interesting what they finally agree on.

Kim Hartsock: (00:23:39) Who knew West Virginia was so powerful? Who would have known well? William and Lisa, it’s always great talking with you.

Always love to hear what’s coming in terms of tax changes, and I’m pretty sure we’ll probably hear from you again this year, depending on how things shake out. Thanks for your time.

Paul Perry: (00:23:58) Definitely bringing William back for ESG and cybersecurity because I think that’s a new thing that he needs to jump on.

William Dow: (00:24:05) Well, I’ll look forward to it and then hopefully we’ll have another podcast on tax with a little more good news for you.

Kim Hartsock: (00:24:10) Great to see you, William and Lisa.

William Dow: (00:24:11) Thank you for inviting us. We always enjoy it.

Lisa Billings: (00:24:14) Yes. I always enjoy sitting down with the two of you and having a good talk and fun.

Paul Perry: (00:24:18) Thank you.

Commentators: (00:24:19) And that’s a wrap. If you’re enjoying the podcast, please leave a review on your streaming platform. Check out more episodes, subscribe to the podcast series, or make a suggestion of other topics you want. Visit us at https://warrenaverett.com/thewrap.

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